Summary
Full Decision
ARBITRAL DECISION
The arbitrators, Advisor Jorge Manuel Lopes de Sousa (arbitrator-president), Dr. Filipa Correia Pinto and Dr. Henrique Fiúza (arbitrators members), appointed by the Ethics Board of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 01-03-2017, agree as follows:
1. Report
A…, S.A., NIPC…, with registered office at …–…, …, … - ……, hereinafter referred to as "Claimant", came, under the terms provided in articles 2, no. 1, paragraph a), 5, no. 3, paragraph a), 6, no. 2, paragraph a), 10, no. 1, paragraph a), all of the Legal Framework for Arbitration in Tax Matters ("RJAT") and article 102, no. 1 of the Code of Tax Procedure and Process ("CPPT"), to request the constitution of an arbitral tribunal for arbitral pronouncement on the illegality and consequent annulment of the following tax acts:
a) Additional assessment of Corporate Income Tax ("IRC") no. 2015…, of 09-11-2015, and consequent acts of assessment of compensatory interest nos. 2015…, of 11-11-2015 and no. 2015…, of 11-11-2015, and of account settlement no. 2015…, of 11-11-2015, all relating to the fiscal year 2011;
b) Additional assessment of IRC no. 2015…, of 09-11-2015, and consequent acts of assessment of compensatory interest no. 2015…, of 12-11-2015, and of account settlement no. 2015…, of 12-11-2015, all referring to fiscal year 2012;
c) Additional assessment of IRC no. 2015…, of 09-11-2015, and consequent acts of assessment of compensatory interest no. 2015…, of 13-11-2015, and of account settlement no. 2015…, of 13-11-2015, all respecting fiscal year 2013;
d) Additional assessment of IRC no. 2015…, of 09-11-2015, and consequent acts of assessment of compensatory interest no. 2015…, of 16-11-2015, and of account settlement no. 2015…, of 16-11-2015, all relating to fiscal year 2014;
e) Annulment of the decision dismissing the administrative appeal that upheld them.
The respondent is the TAX AND CUSTOMS AUTHORITY.
The request for constitution of the arbitral tribunal was accepted by the President of the CAAD and automatically notified to the Tax and Customs Authority on 02-01-2017.
Under the terms provided in paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Board appointed as arbitrators of the collective arbitral tribunal the undersigned, who communicated acceptance of the assignment within the applicable period.
On 14-02-2017, the parties were duly notified of such appointment, having manifested no will to refuse the appointment of the arbitrators, under the combined terms of article 11, no. 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Code of Ethics.
Thus, in accordance with the provision of paragraph c) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 01-03-2017.
The Tax and Customs Authority submitted a response in which it argued that the claim should be ruled unfounded.
On 29-05-2017 and 09-06-2017, meetings were held in which witnesses were examined and it was decided that the proceedings should continue with written submissions.
The Parties submitted written submissions.
The arbitral tribunal was regularly constituted, in accordance with the provisions of articles 2, no. 1, paragraph a), and 10, no. 1, of Decree-Law no. 10/2011, of 20 January, and is competent.
The parties are duly represented and have legal standing and capacity, are legitimate and are represented (articles 4 and 10, no. 2, of the same diploma and article 1 of Order no. 112-A/2011, of 22 March).
The proceedings are free from defects of nullity.
2. Findings of Fact
2.1. Established Facts
Based on the elements in the file and the administrative file attached to the records, the following facts are considered established:
The Claimant, A… SA was founded in 1978, and is 79.97% owned by the company B… SA, with registered office in Spain, being part of the multinational group C… founded in Germany in 1924 and whose decision-making centre was, during the periods 2011 to 2014, in the Netherlands through the company D… (TIN NL…)
The national capital participation is ensured by the company E… SGPS SA, which belongs to the family of entrepreneur F…, who holds a 50% stake in the capital thereof and the two sons held an equal 25% stake until the end of 2012;
The Tax and Customs Authority carried out an external inspection action of general scope for fiscal years 2011, 2012 and 2013, and of partial scope (IRC) for fiscal year 2014, carried out by the Tax Inspection Services ("SIT") of the Directorate of Finance of…, under service orders nos. OI2014… and OI2015…, because the Claimant had made (i) regular monthly notification of inventory write-downs and (ii) negative equity variations in IRC model 22 of high amounts;
In such inspection, the Tax Inspection Report was prepared, a copy of which is attached as document no. 2 with the request for arbitral pronouncement, the contents of which are deemed reproduced, in which corrections were made, in the context of IRC, which are summarized in the following table:
[Table in original document]
In the Tax Inspection Report, the following is stated, among other matters:
III. DESCRIPTION OF FACTS AND GROUNDS FOR PURELY ARITHMETIC CORRECTIONS
(...)
III.2. IN THE CONTEXT OF IRC - TAXABLE INCOME
III.2.1. POC/IAS Transition Adjustments without tax relevance
The approval of the Accounting Standardization System (SNC), through Decree-Law no. 158/2009, of 13 July, introduced new national accounting standards and repealed the Official Chart of Accounts (POC). The POC/SNC transition contemplated a set of transition adjustments, related to the recognition, derecognition, change in measurement and reclassification of balance sheet items, capable of generating an impact on equity (as a rule, on retained earnings).
These transition adjustments stem from the divergences in measurement criteria and recognition policies of the SNC compared to the previous regime. The differences introduced in accounting standards with the approval of the SNC required adjustments to the accounting done under POC, so that on 1 January 2010 a balance sheet (opening balances) would be obtained in accordance with the new standards, as per Accounting and Financial Reporting Standard (NCRF) 3 - First-time Adoption of NCRF.
Now, some of these adjustments may be classified as "tax-relevant". If they are, that impact, which occurred in accounting terms in the transition period (2010), is covered by a transitional regime, which will spread its effect, in tax terms, over five tax periods (2010 to 2014), as follows from nos. 1 and 5 of article 5 of Decree-Law no. 159/2009. With respect to the interpretation of article 5 of Decree-Law no. 159/2009, the Tax and Customs Authority's understanding was established through the issuance of Circular no. 7/2011, clarifying, among other things, what was understood by "tax-relevant adjustments". According to Circular no. 7/2011:
"variations in equity resulting, namely, from recognition, or non-recognition, of assets or liabilities, as well as changes in their measurement, should only be tax-relevant insofar as the expenses, income and equity variations that are to be recognized after such transition are also tax-relevant".
Transition adjustments of an accounting nature under POC/SNC only have a framework in the transitional regime of article 5 of Decree-Law no. 159/2009, and therefore have tax implications, if they result from the recognition, derecognition or change in measurement of items whose nature has tax acceptance under the new CIRC. However, more complex cases occurred that are not as straightforward to interpret as referred to.
Now, the taxpayer A…, in conducting the POC/SNC transition procedures, identified three situations that generated accounting adjustments with an impact on equity, namely:
Thus, through the recognition of a new liability (provision) and the derecognition of the two assets (intangible and deferred cost) a negative impact was generated in an equity account ("SNC 562 Retained Earnings - SNC Conversion") in the total amount of EUR 1,998,952.03.
In terms of section 07 of the IRC model 22 income tax return, for the periods 2010 to 2014, the taxpayer entered, in field 705 "Negative equity variations - transitional regime", the amount of EUR 432,374.44 which results from the spread over five periods of the negative impact in equity referred to above (-EUR 1,998,952.03) and also from the inclusion, within the scope of the transitional regime, of the "provision for treasury applications" existing on 31 December 2009 with a balance of EUR 162,920.16, as per the following table:
[Table in original document]
It is now necessary to assess the tax acceptance, or not, of the classification of such operations within the scope of the transitional regime of article 5 of Decree-Law no. 159/2009.
a) Derecognition of intangible fixed assets
The taxpayer proceeded to derecognize assets classified under POC as intangible fixed assets (development expenses), with a net accounting value on 31 December 2009 of EUR 12,037.07. This transition procedure is based on the fact that the current accounting standards under SNC (NCRF 6 - Intangible Assets) do not classify such items as capitalizable, being considered as expenses of the period in which they are incurred.
This transition adjustment generated a negative impact on equity. Such adjustment is considered as tax-relevant, influencing the determination of taxable profit for the 2010 period and the following four periods, since, in tax terms, the CIRC does not provide differently from what is stipulated in the SNC accounting standards.
b) Recognition of provision for customer warranties
A… is dedicated to the sale of household appliances subject to the provision of warranties for two years, under the terms of applicable legislation, incurring expenses with the repairs/replacements carried out.
On 31 December 2009, the taxpayer had not recorded any provision allocation to cover such expenses in future periods. When transitioning to POC/SNC, the taxpayer proceeded to establish a provision for customer warranties in the amount of EUR 732,357.41, generating a consequent negative impact on equity.
Now, under NCRF 21 - Provisions, Contingent Liabilities and Contingent Assets, a provision is a liability of uncertain timing and amount, as it corresponds to a present obligation that would have had to exist on 31 December 2009 (or 1 January 2010), arising from past events (the sales of products with warranty made until 31 December 2009), whose settlement of the obligation (restoration of the condition of the items) implies an outflow of resources (expenses incurred with the repair of the items). The amount of the obligation had to be estimated, due to the uncertainty associated with this liability, with A… resorting to the tax criterion provided in no. 5 of article 39 of the CIRC. According to such tax rule:
"the annual amount of the provision for customer warranties referred to in paragraph b) of no. 1 is determined by applying to sales and service provision subject to warranty made in the tax period a percentage that cannot exceed the one resulting from the ratio between the sum of expenses derived from customer warranties effectively borne in the last three tax periods and the sum of sales and service provision subject to warranty made in the same periods".
In that sense, the taxpayer determined such percentage as follows:
[Table in original document]
The costs with warranties correspond to expenses borne by A… with the outsourcing of companies specialized in providing household appliance repair services, with the values considered for the purposes of determining the annual limits provided for in tax legislation being obtained from records in the account "SNC 621 Subcontracting" associated with the cost centre SAT (Technical Assistance Service).
For the purposes of measuring the provision allocation for customer warranties on 31 December 2009, the percentage of 2.06% on sales for the 2009 period subject to warranty was thus used, that is, EUR 35,523,163.72 x 2.06% = EUR 732,357.41.
The taxpayer considered the transition adjustment associated with the establishment of such provision, which generated a negative impact on equity, as tax-relevant, to the extent that it qualified it for the purposes of spread over five periods of the transitional regime (2010 to 2014) in the field of "negative equity variations - transitional regime" (field 705).
However, the tax acceptance of the inclusion of such transition adjustment within the scope of the transitional regime of article 5 of Decree-Law no. 159/2009 would imply, in tax terms, that an expense was now being accepted in the periods 2010 to 2014, for the purposes of determining taxable profit, relating to tax periods prior to 2010. Now, since the tax acceptance of provisions for customer warranties only came to be provided for with the entry into force of Decree-Law no. 159/2009, which amended the CIRC following the introduction of the SNC, such transition adjustment shall not be considered as tax-relevant.
In this interpretation sense, see what is referred to in Circular no. 8/2010, which although concerning "construction contracts" also includes the matter of "provisions for customer warranties", in which it is stipulated that:
"(...) if taxpayers, at the date of transition to the new accounting standards, have accounted for the provision for customer warranties, assuming that it was a change in accounting policy (applying it retrospectively), the accumulated amount - recorded as a debit to retained earnings constitutes a negative equity variation that cannot negatively compete for the formation of taxable profit. This is because in the tax periods prior to 2010 such provision was not provided for in the CIRC".
On the other hand, the transitional regime provided for in nos. 1 and 5 of article 5 of Decree-Law no. 159/2009 is limited only to "the effects on equity resulting from the adoption, for the first time" of the new accounting standards, that is, they must respect changes resulting from accounting policies under SNC different from those that prevailed under POC. Now, the international accounting standard IAS 37 - Provisions, Contingent Liabilities and Contingent Assets, of supplementary application within the scope of POC through Accounting Directive no. 18, already foresaw the recognition of such type of provision, in equal form foreseen in the current NCRF 21. Thus, the non-existence of a provision established under POC on 31 December 2009 reveals only the finding of an error made in the POC accounting, and the transition adjustment aimed at correcting such error could never be considered, for that very reason, as a change in policy, therefore such adjustment is not subject to the transitional regime of article 5 of Decree-Law no. 159/2009.
Thus, it cannot be accepted that the annual amount of EUR 146,471.48, corresponding to the spread of the negative impact of EUR 732,357.41 over five periods of the transitional regime, influence the determination of taxable profit for the periods included in the present inspection procedure (2011, 2012, 2013 and 2014).
c) Derecognition of deferred costs associated with indemnification to distributors
On 23 September 2004, the taxpayer concluded two agreements to rescind exclusive distribution contracts that were in force with entities G… and H…. G… held the exclusive distribution right in the district of … and some bordering municipalities and H… operated exclusively in the Greater Lisbon area, as per the rescission contracts in Annex 6.
In order to be able to break such exclusive contracts, A… had to bear a set of expenses, by way of indemnification, which were considered as attributable "to costs systematically over a period of 10 years", as explained in note 4 to the Annex to the financial statements of 2010. Now, the taxpayer proceeded to the recognition of "deferred costs", with the balance of such an asset account on 31 December 2009 ("POC 272") amounting to EUR 1,254,557.55, corresponding to the amount that would still need to be spread over the remaining period given the 10-year period previously stipulated.
In the course of the inspection procedure, an attempt was made to obtain justifications for the value of the indemnifications allocated and for the period of time stipulated to spread such expenses. The contract in Annex 6 was presented to support the values in question, although it is not possible to deduce from the same any support for the calculation of the amounts. That is, there is no evidence demonstrating that the values of indemnifications paid are correlated with the measurement of any cash inflows or outflows relating to a determined period of time.
On the other hand, regarding the 10-year period defined for deferring such expenses, it was initially stated that this would result from what was considered appropriate by the management body advised by opinions from consultants and/or external auditor at the time. Subsequently, an amendment to the rescission agreement was presented (see Annex 7), not dated, concluded between the 3 companies involved (A…, G… and H…) but, strangely, only signed by the representatives of A… and G…. In such amendment the following was stipulated:
"Considering that the rescission of the distribution contract will produce, in accordance with estimates made by the parties, an impact in the form of lost profits in H… and G… and of contrary effect in A…, for a period of no less than ten years, the parties agree to reflect such impact in their respective accounting records, with H… and G… accounting for it as Deferred Income and A… as a Deferred Cost, for which purpose the period between 1 November 2004 and the end of 31 October 2014 shall be considered, with an annual allocation of a constant value, with the value to be attributed to the years 2004 and 2014 being proportional to the number of months covered".
It is important to note that the ten-year period used by A… is not supported by any clause of the distribution contracts dating back to 1984. The contracts concluded between A… and G… and H… were not even presented by the taxpayer, so the existence of prior definition of the duration of such contract was unknown.
During the inspection action, the Tax Inspection Services (SIT) made inquiries with G… and H…. With respect to G…, accounting elements were collected that prove that this taxpayer proceeded with the phased recognition of such income (benefit) only over 5 periods, from 2004 to 2009, as can be deduced from the extract of movements of the account "POC 2749" (deferred income) of the accounting of G… in Annex 8, contradicting and revealing inconsistencies with the amendment to the rescission agreement presented by A… (in Annex 7).
For its part, H… also proceeded with the allocation of such income (benefit) over 5 periods, from 2004 to 2009, as can be deduced from the documents sent by the company (see Annex I).
Thus, the accounting treatment effected by G… and H… brings into question the veracity of the amendment to the rescission agreement (see Annex 7) presented by A… to support the spread of such expense over the 10 years invoked. It should be recalled that such amendment to the rescission agreement, which is not dated, would have been concluded between the 3 companies involved (A…, G… and H…) but only signed by the representatives of A… and G….
On the other hand, according to the legislation in force in the context of IRC prior to Decree-Law no. 159/2009, Indemnifications for lost profits are considered as income of the fiscal year in which they are received, under the terms of paragraph g) of no. 1 of article 20 of the CIRC, at the time, which stipulated:
"Income or gains shall be considered those derived from operations of any nature, as a result of normal or occasional action, basic or merely accessory, namely those resulting from: g) indemnifications earned, whatever the title may be".
That is, it is the moment at which the indemnification is earned (received) that determines its taxation, following the realization principle.
Thus, since the amounts attributed by A… to G… and H… were paid in 2004 and 2005, as attested by the payment means evidence collected during the inspection action (see Annex 10) such income should have been taxed, in the sphere of G… and H…, in the tax periods of 2004 and 2005 and not spread over the periods from 2004 to 2009, as G… and H… did. For its part, A… spread such expense with indemnifications over a period of 10 years.
Now, even under POC such an expenditure should never have been capitalized as an asset (deferred cost), as it does not meet the definition of an asset in force in the international accounting standards issued by the International Accounting Standards Board (IASB), with supplementary application provided for in Accounting Directive no. 18. According to the conceptual framework of the IASB, an asset is "a resource controlled by the entity as a result of past events and from which it is expected that economic benefits will flow to the entity" (emphasis added).
In truth, A… did not have any control over the benefits that could accrue to the entity. Control exists when an entity has the power to obtain the future economic benefits of a resource and to restrict the access of others to those benefits. Now, A… could not ensure that the allocation of a geographical area would allow it to guarantee, by itself, the inflow of future economic benefits and prevent access to those benefits to other competitors (manufacturers and distributors of household appliances of the most varied brands).
The very accounting itself, carried out by the taxpayer, in the account "POC 272 Deferred Costs" does not comply with the explanatory notes provided for in point 12 of the Official Chart of Accounts in force until 31 December 2009, in which it is stipulated that such an account "comprises costs that should be recognized in following fiscal years", adding that "the portion of deferrals included in this account that is to be allocated to each fiscal year will directly affect the respective cost account". In truth, the taxpayer had no way of determining with reliability and rigor the number of fiscal years over which it would spread such deferred cost. And it is thus that there was a differentiated accounting treatment, in terms of time period, between A… (10 years) and the beneficiaries G… and H… (5 years).
On the other hand, even the possible classification as intangible fixed assets (account "POC 433 Industrial Property and Other Rights") would also not meet the definition of an intangible asset provided for in §10 of the international accounting standard IAS 38 - Intangibles, with supplementary application within the scope of POC through Accounting Directive no. 18, and in equal form provided for in the current NCRF 6 - Intangible Assets. Such standards provide that the definition of an intangible asset requires "identifiability, control over a resource and the existence of future economic benefits" (emphasis added).
The payments to G… and H…, as consideration for the acquisition of rights over exclusive distribution in the geographical areas in question, could be assimilated to the acquisition of a customer portfolio. But according to §16 of IAS 38, with supplementary application in the POC era, "in the absence of legal rights to protect, or other ways to control, customer relationships or their loyalty to the entity, the entity generally does not have sufficient control over the expected economic benefits derived from customer relationship and loyalty to such items (for example, customer portfolio, market share, customer relationships and customer loyalty) to satisfy the definition of intangible assets" (similarly under the terms of §16 of NCRF 6). In this way, such expenditures could never be capitalized.
On the other hand, according to §89 of IAS 38, and similarly provided for in the current NCRF 6, "the accounting for an intangible asset is based on its useful life. An intangible asset with a finite useful life is amortized, and an intangible asset with an indefinite useful life is not", adding in §107 of IAS 38 and NCRF 6 that "an intangible asset with an indefinite useful life shall not be amortized".
Similarly, in tax terms, such types of assets were not depreciable (and continued not to be with the publication of Decree-Law no. 159/2009, of 13 July and Regulatory Decree no. 25/2009, of 14 September), since exclusive use was not recognized for a limited period of time, as required by no. 1 and paragraph c) of no. 2 of article 17 of Regulatory Decree no. 2/90, of 12 January (in the same manner in article 16 of Regulatory Decree no. 25/2009, of 14 September):
"1. Elements of the intangible fixed asset are depreciable when subject to depreciation, namely because they have a limited time validity.
- The following elements of intangible fixed assets are depreciable: (...) c) Elements of industrial property, such as patents, trademarks, licenses, manufacturing processes, models or other assimilated rights, acquired for a consideration and whose exclusive use is recognized for a limited period of time" (emphasis added).
or by the peremptory prohibition provided for in paragraph b) of no. 3 of the same article (in the same manner in article 16 of Regulatory Decree no. 25/2009, of 14 September):
"Except in case of effective depreciation duly proved, recognized by the Directorate-General of Contributions and Taxes, the following elements of intangible fixed assets are not depreciable: b) Elements mentioned in paragraph c) of the preceding number when the conditions referred to therein are not met".
Furthermore, the fact persists that, as of the date of this report, an exclusivity agreement with the firm I… exists for the northern zone, equivalent to the one concluded with G… and H…, which clearly shows the power and interest of the latter in maintaining such exclusive regime in that distribution area. Now, after a request for clarification from the Tax Authority (AT) to the company I…, it stated that "there is no formalized contract", although the exclusive distribution agreement exists "from 1984 (...) having no validity period" (see documents in Annex 11).
Thus, it is possible to assert that there was no definition of a time period in the initial contracts concluded in 1984 with G…, H… and I… (see Annex 12) which made the right to exclusivity eternal and could qualify the operation as acquisition of a right/license, but with no amount depreciable due to the non-existence of a defined useful life.
Thus, the derecognition carried out by A… cannot be qualified as tax-relevant, for the purposes of the transitional regime provided for in article 5 of Decree-Law no. 159/2009, because, either:
• the indemnifications should have been accounted for as complete expenses of the periods in which they were paid (2004 and 2005), as they do not meet the criteria for recognition of assets, and thus no asset would subsist under POC on 31 December 2009. In this way, there would be no impact at the level of retained earnings and the amount of EUR 1,254,557.55 would never influence the taxable profit of the periods from 2010 to 2014;
• or, even if it were classified as an asset (deferred cost or intangible fixed assets) it would never qualify even as a depreciable asset generating expenses, either in accounting or tax terms, whether before or after the introduction of the SNC and the consequent change in tax legislation. And thus, the tax relevance of the transition procedure would be precluded, so the amount of EUR 1,254,557.55 would also never be spread over the periods from 2010 to 2014.
Furthermore, the transitional regime provided for in article 5 of Decree-Law no. 159/2009 only contemplates the effects on equity resulting from the adoption for the first time of the new accounting standards, which must necessarily result from a change in accounting policy between POC and SNC, completely precluding, in this way, any recognition, derecognition or change in measurement resulting from errors made under the previous regulatory regime, as also stipulated in §16 of NCRF 3 - First-time Adoption of NCRF ("If an entity identifies errors made under previous GAAP, the reconciliations required in paragraphs 14 (a) to 14 (b) must distinguish between the correction of such errors and changes in accounting policies").
Now, in truth, there was no change in accounting policy between POC and SNC, regarding the accounting treatment of such type of operation, with no differences in treatment between the two standards, so if adjustments existed at transition they would, necessarily, have to result from accounting errors made under POC with reflection in the balance sheet balances on 31 December 2009.
Furthermore, the Tax and Customs Authority's understanding as to what it considers "tax-relevant adjustments" is peremptory in Circular no. 7/2011:
"variations in equity that result, namely, from recognition, or non-recognition, of assets or liabilities, as well as changes in their measurement, should only be tax-relevant insofar as the expenses, income and equity variations that are to be recognized after such transition are also tax-relevant" (emphasis added).
Thus, since, even if an asset subsisted on 31 December 2009, it would not be depreciable, nor was it previously, the requirement is not met "that the expenses (...) that are to be recognized after such transition are also tax-relevant" (emphasis added).
d) Classification of provision for treasury applications in the transitional regime
The taxpayer A… proceeded with the inclusion, within the scope of the transitional regime, of the "provision for treasury applications" existing on 31 December 2009 with a balance of EUR 162,920.16, as per the following table:
[Table in original document]
The provision (designation under POC) in question relates to the write-down of the value of shares listed on the stock exchange relating to entities RR…, QQ… and PP….
[Table in original document]
The said provision was established under POC, on 31 December 2009, in the account "POC 19 Provisions for Treasury Applications", for the amount of EUR 162,920.16. The amount of the provision corresponds to the difference between the cost of acquisition of the shares and the market price thereof, with the latter being lower on that date.
That is, in terms of transition procedures, the taxpayer merely carried out a reclassification of accounting items, with no transition adjustment implying impact on equity, since the accounting policy followed by the company under POC is the same as that imposed by the SNC standards, that is, the asset in question (shares listed on the stock exchange) must be measured at its fair value (market value), under the terms of NCRF 27 - Financial Instruments.
That is, under POC, on 31 December 2009, the net asset amounted to EUR 23,996.87, as per the following table:
[Table in original document]
On 01 January 2010, the same asset showed a carrying amount of EUR 23,996.87, as per the following table:
[Table in original document]
That is, in the transition POC/SNC only reclassifications occurred given the change in the structure of the chart of accounts. Thus, no transition adjustments with impact on equity were made.
Now, according to nos. 1 and 5 of article 5 of Decree-Law no. 159/2009, the effects on equity resulting from the adoption for the first time of the SNC, which are considered tax-relevant under the CIRC and respective complementary legislation, resulting from:
• the recognition,
• the non-recognition of assets or liabilities (derecognition),
• changes in their respective measurement,
are split equally for the formation of taxable profit of the first tax period in which such standards apply and the four following tax periods.
Thus, given the wording of article 5 of Decree-Law no. 159/2009, only transition adjustments with effects on equity could be part of the transitional regime, not contemplating those resulting from mere account reclassifications.
However, taking into account the doctrine emanated from various instructions and information from the services of the Tax and Customs Authority (AT), it was understood to accept 50% of the amount inherent in fair value reductions, whether already accounted for under POC (account 19 Provisions for Treasury Application — as occurred in A…) or only recorded at transition with impact on equity.
This position has been defended on the basis that no. 9 of article 18 of the CIRC establishes that adjustments resulting from the application of fair value contribute to the formation of taxable profit when they respect financial instruments recognized at fair value through results, provided that, being equity instruments, they have a price formed in a regulated market and the taxpayer does not hold, directly or indirectly, a stake in the capital greater than 5% of the respective capital (wording prior to Law no. 2/2014, of 16 January).
And on the other hand, by what is recommended in no. 3 of article 45 of the CIRC (wording prior to Law no. 2/2014, of 16 January), which in the case of a loss being determined by reduction in fair value, establishes that "(...) other losses ... relating to equity interests, (...) contribute to the formation of taxable profit in only half of their value". The expression "as well as other losses (...) relating to equity interests" used by the legislator in the second part of no. 3 of art. 45 of the CIRC does not apply only to losses resulting from onerous transfer, encompassing also losses resulting from the application of fair value to financial instruments classifiable under paragraph a) of no. 9 of article 18 of the CIRC.
Thus, given that the fair value reductions of these equity interests are qualified as losses, they must be considered, under the terms of the referred to no. 3 of article 45 of the CIRC in only 50% of their value.
Thus, it cannot be accepted that the annual amount of EUR 32,584.03, corresponding to the spread of the credit balance of the provision of EUR 162,920.16 over five periods of the transitional regime, influence the determination of taxable profit for the periods included in the present inspection procedure (2011, 2012, 2013 and 2014), with only 50% of that amount being able to be relevant in the context of IRC.
e) Summary of corrections associated with the transitional regime applicable to POC/SNC transition adjustments
Given what has been set out throughout point III.2.1, above, it is now important to summarize the correction proposed to field 705 of section 07 of the IRC model 22 income tax return for the periods of 2011, 2012, 2013 and 2014:
[Table in original document]
• Regarding the provision for financial applications, only 50% (EUR 81,460.08) of such losses will be considered tax-relevant, instead of the 100% (EUR 162,920.16) reported by A….
• The provision for customer warranties (EUR 732,357.41) recognized at transition is not considered as tax-relevant.
• The derecognition of the intangible asset (EUR 12,037.07) is accepted as tax-relevant.
• The derecognition of the deferred cost associated with indemnifications paid to distributors (EUR 1,254,557.55) is not considered as tax-relevant.
Thus, under the terms of article 5 of Decree-Law no. 159/2009, it is necessary that the taxpayer proceed to reduce by EUR 413,675.01 the value entered in field 705 of section 07 of the IRC model 22 income tax return for the periods of 2011, 2012, 2013 and 2014, proceeding to enter only the amount of EUR 18,699.43 as negative equity variation in each of those periods.
III.2.2. Fair value adjustments in financial instruments
According to NCRF 27 - Financial Instruments, investments in equity instruments with publicly disclosed quotations must be measured at fair value through results.
During the periods of 2011 and 2012, the taxpayer proceeded to account for losses from fair value reductions in financial instruments held for trading recorded in account "SNC 14", as per the following tables:
[Tables in original document]
In 2011 and 2012, losses were recorded in account "SNC 66 Losses from Fair Value Reduction" in the amounts of EUR 8,822.80 and EUR 1,600.80, respectively. In the period 2013, a gain from fair value increase was recorded in account "SNC 77", in the amount of EUR 3,054.61.
Now, as we saw in point III.2.1, above, in the aspect of transition adjustments associated with financial instruments, these losses from fair value reduction may only be accepted tax-wise in 50% of their amount.
As referred to, no. 9 of article 18 of the CIRC establishes that adjustments resulting from the application of fair value contribute to the formation of taxable profit when they respect financial instruments recognized at fair value through results, provided that, being equity instruments, they have a price formed in a regulated market and the taxpayer does not hold, directly or indirectly, a stake in the capital greater than 5% of the respective capital (wording prior to Law no. 2/2014, of 16 January).
For its part, no. 3 of article 45, in force during the periods under analysis, limits the tax acceptance of such losses from fair value reduction to 50%, since it establishes that "(...) other losses (...) relating to equity interests, (...) contribute to the formation of taxable profit in only half of their value". The expression "as well as other losses (...) relating to equity interests" used by the legislator in the second part of no. 3 of art. 45 of the CIRC does not apply only to losses resulting from onerous transfer, encompassing also losses resulting from the application of fair value to financial instruments classifiable under paragraph a) of no. 9 of article 18 of the CIRC.
Thus, given that the fair value reductions of these equity interests are qualified as losses, they must be considered, under the terms of the referred to no. 3 of article 45 of the CIRC, in only 50% of their value, as per the following table:
[Table in original document]
Now, the taxpayer did not proceed with any correction, regarding this issue, in section 07 of the IRC model 22 income tax return, when determining taxable profit for the periods of 2011 and 2012. Thus, under the terms of articles 18 and 45 of the CIRC, in force at the time of the facts, it is necessary that the taxpayer proceed to add the amounts of EUR 4,411.40 and EUR 800.40 to field 737 of section 07 of the IRC model 22 income tax return for the tax periods of 2011 and 2012, respectively.
III.2.3. Non-accepted expenses - capitalizable expenses
Under the terms of no. 3 of article 17 of the CIRC, "in order to allow the determination referred to in no. 1 (taxable profit), accounting must: a) be organized in accordance with accounting standards (...)". Now, in the periods 2011 to 2013, the taxpayer incurred various expenses, as per documents in Annex A on CD, relating to invoices for the acquisition of goods and services that clearly integrate the definition of tangible fixed assets and which, as such, should have been capitalized and included in the codes provided for in Regulatory Decree no. 25/2009, of 14 September.
Such expenses were accounted for in sub-accounts of account "SNC 62 Supplies and External Services", when acquisitions of goods and services would determine the capitalization of such expenses as part of tangible fixed assets, under the terms of NCRF 7 - Tangible Fixed Assets, due to the nature of the items in question and also due to the amounts associated. Under the terms of §6 of NCRF 7, "tangible fixed assets: are items that: a) are held for use in the production or supply of goods or services, for lease to others, or for administrative purposes; and b) are expected to be used for more than one period".
On the other hand, § 8 of NCRF 7 stipulates that "spare parts and standby equipment are classified as tangible fixed assets when an entity expects to use them for more than one period. Similarly, if spare parts and service equipment can be used in connection with a tangible fixed asset item, they are accounted for as tangible fixed assets".
Furthermore, as per §11 of NCRF 7 "may be considered on assets for a single amount and fixed amount, the items immobilized that, taken together, satisfy simultaneously the following conditions: a) are renewed frequently; b) represent, all in all, an immaterial amount for the entity; c) have a useful life not exceeding three years".
Thus, the taxpayer should have capitalized and not considered as an expense of the period the following items:
• Expenses with tools and implements (extrusion, cnc, injection systems, gears, converter modules and power modules, ...) acquired from various suppliers are classifiable under code "1070 Tools and implements for specific use" of Table I of Regulatory Decree no. 25/2009, of 14 September, provided for in group 11 where are included "other metalworking, metalomechanical and electrical material industries".
• Expenses with molds are classifiable under code "1065 Molds" of Table I of Regulatory Decree no. 25/2009, of 14 September, provided for in group 11 where are included "other metalworking, metalomechanical and electrical material industries".
• Expenses with the remodeling of the showroom are classifiable under code "2186 Exhibition spaces" of Table II of Regulatory Decree no. 25/2009, of 14 September, provided for in group 2 relating to "installations".
• Expenses with computer equipment are classifiable under code "2240 Computers" of Table II of Regulatory Decree no. 25/2009, of 14 September, provided for in group 3 relating to "machinery, appliances and tools".
• Expenses with electrical material shall be considered as a component of electrical installations and therefore classifiable under code "2095 Electrical installations" of Table II of Regulatory Decree no. 25/2009, of 14 September, provided for in group 2 relating to "installations".
• Expenses with the execution of a gate, respective accessory services, as well as civil construction and painting services, shall be considered as a component installation of the building and therefore classifiable under code "2195 Unspecified installations" of Table II of Regulatory Decree no. 25/2009, of 14 September, provided for in group 2 relating to "installations".
• Expenses with sanitary material are classifiable under code "2195 Unspecified installations" of Table II of Regulatory Decree no. 25/2009, of 14 September, provided for in group 2 relating to "installations".
• Expenses for civil construction services shall be considered as a component of the building and therefore classifiable under code "2020 Industrial Buildings" of Table II of Regulatory Decree no. 25/2009, of 14 September, provided for in group 1 relating to "installations".
The following tables summarize the corrections required in the periods of 2011, 2012 and 2013:
[Tables in original document]
Thus, under the terms of no. 3 of article 17, article 23 and article 29, all of the CIRC, it is necessary that the taxpayer proceed to add the amounts of EUR 68,673.54, EUR 58,114.00 and EUR 68,091.83 to field 752 of section 07 of the IRC model 22 income tax return for the tax periods of 2011, 2012 and 2013, respectively, as it is considered that such expenses are not to be accepted in a single period, and should be capitalized and depreciated during the corresponding useful life period.
III.2.4. Non-recorded expenses accepted tax-wise - Depreciations
Given what was set out in point III.2.3, above, in the periods 2011, 2012 and 2013, it was considered that expenses borne by the taxpayer and accounted for as period expenses should be capitalized. As a consequence of the proposed correction, relating to the capitalization of such expenses, it is now necessary to proceed with the tax acceptance of depreciations that would have been practiced, had such capitalization occurred in the accounts.
Taking into account the rates provided for in Tables I and II of Regulatory Decree no. 25/2009, of 14 September, applicable to the respective codes referred to in the previous point (III.2.3, above), and under the terms of articles 29 and 30, both of the CIRC in force at the time, it is necessary that the taxpayer proceed to deduct the amount of EUR 20,453.39, EUR 35,753.81, EUR 55,542.11 and EUR 38,671.29 in field 775 of section 07 of the IRC model 22 income tax return for the tax periods of 2011, 2012, 2013 and 2014, respectively, as it is considered that such expenses are not to be accepted in a single period and should be capitalized and depreciated during the corresponding useful life period.
III.2.5. Expenses of prior periods
On 31 December 2013, the taxpayer proceeded to record a credit note issued to customer J… (Italy), in the amount of EUR 111,503.00, whose description respects a "bonus discount related to the overall sales of 2013", as per Annex 13.
Such document generated a reduction of the net value of sales for the period of 2013, via the accounting of a discount and allowance on sales in the account "SNC 718322 - Rapei - N. Crédito- P.Acab.Int.-Intra-community Supplies", as per entry no. CR T3/….
However, according to the document in Annex 13, it is possible to verify that, in fact, such a credit to the customer does not respect the period of 2013, and would thus be an expense relating to prior periods, which should have been accounted for in account "SNC 6881 Corrections relating to prior periods", as it corresponds to an adjustment of billing of periods prior to 2013.
Now, under the terms of no. 2 of article 18 of the CIRC, "positive or negative components considered as respecting prior periods are only attributable to the tax period when on the date of closing the accounts of the one to which they should be attributed they were unforeseeable or manifestly unknown". Now, the unforeseeable nature or unknown character of such expenses cannot be invoked for the operation described, to the extent that the events result from normal and contractualized commercial transactions between A… and its customer J….
Thus, under the terms of article 18, it is necessary that the taxpayer proceed to add the amount of EUR 111,503.00 to field 710 of section 07 of the IRC model 22 income tax return for the period 2013.
III.2.6. Non-accepted expenses - K…
Under the terms of no. 1 of article 23 of the CIRC, in force at the time of the facts, "expenses are considered those that are duly proven to be indispensable for the realization of income subject to tax or for the maintenance of the income-producing source".
In the periods 2011 and 2012, the taxpayer A… recorded the accounting of invoices relating to supposed services provided by entity K…, NIF…, with tax domicile in … (Hungary), as per the following table and documents in Annex 14:
[Table in original document]
The taxpayer was requested to present elements proving the nature of such services and their effective realization, as per Annex 15. In response, it was stated that it was not possible to "obtain any document that could evidence the services provided", explaining that they would be "consulting services provided to the former administration" (see Annex IV referring to executive director L…, as was orally transmitted by the Financial Director and Statutory Auditor of A… to the Tax Inspection technicians.
Now, at the time of issuance of the invoices, L… was indeed executive director, of Spanish nationality and tax domicile in Switzerland, who held such position of executive director from 08 July 2010 to 08 November 2011 as per permanent certificate.
It is important to note that the invoices issued by K… correspond to the periods from 01 January to 31 December 2011 and from 01 January to 31 December 2012, as per the description entered therein (see Annex 14). Thus, since the former administration, namely its executive director L…, began office on 08 July 2011 and ceased such functions on 08 November 2012, it would remain to be explained why the supposed consulting during the first 6 months of 2011 and the last two of 2012, or why K… did not continue to provide such type of services to the following administration, if they were truly indispensable for the activity of A….
Since the company did not have any documents supporting such expenses, searches were conducted regarding the supposed service provider, having found in consultation of Hungarian internet websites that K… had been forcibly terminated, which immediately raised serious doubts about the credibility of the documents issued by such company.
Thus, a request for the exchange of information was sent to the Hungarian tax authorities, under the framework of the administrative cooperation provided for in Council Directive 2011/16/EU, of 15 February, requesting information on the nature of the services provided, in addition to evidence of the actual realization of the services charged to A….
In response (see Annex 16), the Hungarian tax administration (Nemzeti Adó-és Vámhivatal - NAV) confirmed that K… had been forcibly cancelled ("under forced cancellation"), that it is no longer at the registered address and that they were unable to access any documents from that company. The NAV also reported that the company had no employees.
Additionally, it is stated that L… was a member of the board of directors and representative of M… (M…, NIF…), during the period from 18 May 2010 to 22 May 2012. In parallel, L… was also a representative and partner of company N… (NIF…), which was also forcibly cancelled. It is important to note that all 3 Hungarian companies referred to (M…, K… and N…) have their tax domicile at the same address (… …). Finally, it is stated that no Hungarian company declared payments to L… and that he was not subjected to any taxation in that country.
Given the foregoing, there are several indicators that raise suspicions about the provision of services by K… to A…, since:
• the Hungarian company was forcibly terminated, which reveals irregularities in the exercise of its activity, possibly fictitious;
• the Hungarian entities were unable to access documents from the company, despite the tax domicile coinciding with that of company M…;
• the Hungarian company had no employees, which raises well-founded doubts about the way in which it would carry out the supposed "consulting services provided to the former administration" of A…;
• the Hungarian companies K… and N…, both with tax domicile coinciding with that of M…, are directly or indirectly related to the former executive director L…, and both companies were forcibly terminated;
• even if such services charged to A… were associated with an indirect form of payment of additional remuneration to executive director L…, it is verified that the Hungarian authorities attest that no Hungarian company declared payments to L… and that he was not subjected to any taxation in that country.
Now, although the burden of proof regarding the indispensability of expenses does not rest, in first instance, with the taxpayer, it is imputable to him if the tax administration, acting under the principle of legality, groundedly, triggers doubt about the justified relationship of a determined expense with the activity of the taxpayer, as defended by the Decision of the Central Administrative Court of the South (TCAS), case no. 05312, of 27 March 2012.
Thus, it shall be incumbent on the taxpayer "necessarily and logically, as it is better positioned to do so (...), requiring, yes, that the taxpayer allege and prove concrete facts, susceptible of verification, capable of demonstrating the reality, veracity, of the business actions causing the recorded expenses (...)" (in Decision TCAS, case no. 05312, of 27 March 2012).
Given the foregoing, although the expenses are supported by invoices issued by K…, the indispensability thereof is not duly proven, as it was necessary to dispel doubts about the actual provision of services and to confirm their connection with the activity of A….
Thus, given the foregoing and under the terms of article 23 of the CIRC, it is necessary that the taxpayer proceed to add the amounts of EUR 50,004.00 and EUR 150,000.00 to field 752 of section 07 of the IRC model 22 income tax return for the periods of 2011 and 2012, respectively.
III.2.7. Non-accepted expenses - E… SGPS
Under the terms of no. 1 of article 23 of the CIRC, in force at the time of the facts, "expenses are considered those that are duly proven to be indispensable for the realization of income subject to tax or for the maintenance of the income-producing source".
In the periods 2011 and 2012, the taxpayer A… recorded the accounting of invoices relating to supposed services provided by the participant company E… SGPS, as per the following table and documents in Annex 17:
[Tables in original document]
The descriptions of the invoices respect supposed market prospecting services, such as Brazil, Cape Verde, Angola, Mozambique and England. In such invoices contractual pieces are mentioned, such as "H/W distribution agreement", relating to Mozambique, "MoU (memorandum of understanding) multi-year partnership with WW…", for the Cape Verde market, and for all services supposedly carried out, there should be reports that would support the diligence of the service provider, so as to report to the contracting party the activities carried out and the results achieved. Such reports, agreements and memoranda of understanding should be, necessarily, in the possession of A….
On the other hand, group C… is a strongly globalized multinational, with presence in 33 countries through its branches and has 27 factories spread across Europe, Asia and America, which allows it to market its products in more than 110 countries, making it obviously strange that it should have to resort to a national company (E… SGPS), whose corporate purpose is mere management of shareholdings, to develop business contacts in the countries in question.
In March 2014, the taxpayer was requested to present elements proving the nature of such services and their effective realization, as per Annex 18.
In response, only in June and July 2015 three reports were sent, prepared by O…, administrator of E… SGPS, relating to introductory negotiations with P… (UK), of November 2012, and with distributors of the Brazilian market, of March and August 2012, as per Annex 19 and Annex B on CD, whose contents reveal no fruitful results for A…, which immediately raises doubts about the merit of the remuneration associated with the values invoiced.
On the other hand, the first report was sent by A… by email on 2 June 2015 (see Annex 18), containing on computer support the file.docx designated "… _UK_Nov12.docx", referring to the report made on 2 November 2012, by O…, relating to the project P…. However, the analysis of the properties of the said file indicate that it was created on 21 May 2015, at 21 hours, as per the following print screen:
[Image/screenshot in original document]
Furthermore, this report of P…, of 02 November 2012, identifies as addressees R…, as per Annex 19, when at that date he was no longer in office at A…, having, inclusively, ceased the exercise of the position of executive director by "permanent impediment" on 07 July 2010, as per permanent certificate in Annex 1.
For its part, the two reports relating to the Brazilian market, sent on computer support.pdf, by email of 07 July 2015, designated "… _Fev12.pdf" and "… _Ago12.pdf, respect the reports made by O… on 10 March 2012 and 28 August 2012, as per Annex 19. However, the analysis of the properties of the said files indicate that they were created on the very day 07 July 2015, one at 06 hours and 05 minutes and the other about 21 minutes later, as per the following print screens:
[Images/screenshots in original document]
Furthermore, both Brazilian reports, of 10 March 2012 and 28 August 2012, identify as addressees Q… and R…, as per Annex 19. Now, regarding R… it has already been proven that he was no longer in office at A…, having, inclusively, ceased the exercise of the position of executive director by "permanent impediment" on 07 July 2010, as per permanent certificate in Annex 1. As for Q…, he only began duties on the Board of Directors of A… from 08 November 2012, following the dismissal on the same date of L…, as per permanent certificate in Annex 1.
Thus, all three reports presented as prepared by O…, during the period of 2012, present incongruities, both as to the date of creation of the files and as to the addressees of the reports, which obviously raise serious doubts as to the authenticity thereof.
Additionally, A… sent files with the scanning of the passports of the administrators of E… SGPS (see Annex 18 and Annex C on CD), containing displacements to many countries in Africa, America and Asia, where are included also the countries mentioned in the invoices under analysis, but which prove nothing as to the nature of the trips, to the extent that they may, and some will certainly be, of a tourist character.
Furthermore, according to no. 1 of article 1 of Decree-Law no. 495/88, of 30 December, which institutes the legal regime of shareholding management companies (SGPS), these "have as their sole contractual purpose the management of shareholdings of other companies, as an indirect form of exercise of an economic activity" (emphasis added), adding no. 2 of article 2 of the same diploma that "the contracts by which SGPS are established must expressly mention as the sole purpose of the company the management of shareholdings or other companies" (emphasis added).
However, according to no. 1 of article 4 of Decree-Law no. 495/88, of 30 December, as amended by Decree-Law no. 318/94, of 24 December, "SGPS are permitted to provide technical administration and management services to all or some of the companies in which they hold shares (...) or with which they have concluded subordination contracts". However, according to no. 2 of article 4 of Decree-Law no. 495/88, of 30 December, as amended by Decree-Law no. 378/98, of 27 November, "the provision of services must be the object of a written contract, in which the corresponding remuneration must be identified".
Thus, the sole corporate purpose of any SGPS is necessarily the "management of shareholdings of other companies as an indirect form of the exercise of economic activity." And even if they are allowed to provide technical services to their subsidiaries, these are limited only to the area of administration and management. Furthermore, if such permitted services are provided, the existence of a written contract providing for the respective remuneration is required.
Now, the services supposedly provided by E… SGPS to A… are completely excluded from those authorized by the legal regime of SGPS and there is no written contract contemplating the purpose and remuneration thereof.
On the other hand, all expenses for displacements and stays presented by the administrator of E… SGPS (see Annex C) will have been entirely borne by him, in a personal capacity, with no document issued in the name of such company. In fact, during the inspection action to A…, a parallel inspection procedure to E… SGPS took place, also developed by the Tax Inspection Services of the Directorate of Finance of …, with no verification of the accounting of any type of expense associated with such displacements and stays in the countries in question. Thus, it cannot fail to be noted, once again, that it is the SGPS that is issuing invoices for market prospecting services, when in reality it was not this company that carried out such supposed business contacts.
To all this are added the recurrent negative results or minimal profits presented by the SGPS, which do not prevent it from being able to issue invoices relating to services, which if they existed, were certainly not provided by the company, but possibly, by its administrators, as the exercise of an activity in an individual capacity.
Given the foregoing, there are several indicators that raise suspicions about the provision of services by E… SGPS to A…, since:
• E… SGPS is a company with special relationships with the taxpayer, as it holds 19.99% of the capital of A…;
• The issuer of the invoices under analysis, being a shareholding management company, is prevented, by its legal regime, from carrying out commercial service provision associated with market prospecting, as provided for in article 1 of Decree-Law no. 495/88, of 30 December;
• The provision of services, although not permitted, had to be supported in a written contract, as required by the provision of article 4 of Decree-Law no. 495/88, of 30 December, which was not verified as no contractual piece was presented by the intervening companies;
• Group C… has an international structure that will certainly allow it to develop business contacts for market prospecting, being farcical that it would supposedly have to resort to a national company without corporate purpose, nor specialization, for the provision of such services;
• Even if such services were effectively provided, the question is raised as to their indispensability for the activity of A…, given its dependence on the global commercial strategy of the company controlling the multinational group (D…BV), and to the extent that only the billing by E… SGPS was recorded in December 2011 and in September and November 2012, imposing the doubt as to why such services have not continued to be provided in late 2012 and 2013, if they were indeed indispensable for the activity of A…;
• All expenses for displacements and stays were borne by the administrators of the SGPS and not by the company, with no accounting of any expense in E… SGPS inherent to the values invoiced to A…, as determined during the procedure to the SGPS;
• The description of the invoices makes mention of agreements and memoranda, which will have been subscribed by the parties involved in the prospecting contacts. However, neither A… nor E… SGPS were able to present any document proving the existence thereof;
• The three reports presented by A…, as prepared by the administrator of E… SGPS, additionally reveal the need for the taxpayer to provide unequivocal evidence contrary to the indicators of lack of authenticity of the invoices, given the incongruities demonstrated above.
Thus, although the burden of proof regarding the indispensability of expenses does not rest, in first instance, with the taxpayer, it is imputable to him if the tax administration, acting under the principle of legality, groundedly, triggers doubt about the justified relationship of a determined expense with the activity of the taxpayer, as defended by the Decision of the Central Administrative Court of the South (TCAS), case no. 05312, of 27 March 2012.
Thus, it shall be incumbent on the taxpayer "necessarily and logically, as it is better positioned to do so (...), requiring, yes, that the taxpayer allege and prove concrete facts, susceptible of verification, capable of demonstrating the reality, veracity, of the business actions causing the recorded expenses (...)" (in Decision TCAS, case no. 05312, of 27 March 2012).
Given the foregoing, although the expenses are supported by invoices issued by E… SGPS, the indispensability and authenticity thereof are not duly proven, as it was necessary to dispel doubts about the actual provision of services by E… SGPS and to confirm their connection with the activity of A….
Thus, given the foregoing and under the terms of article 23 of the CIRC, it is necessary that the taxpayer proceed to add the amounts of EUR 53,500.00 and EUR 119,250.00 to field 752 of section 07 of the IRC model 22 income tax return for the periods of 2011 and 2012, respectively.
III.2.8. Non-accepted expenses - S…
Under the terms of no. 1 of article 23 of the CIRC, in force at the time of the facts, "expenses are considered those that are duly proven to be indispensable for the realization of income subject to tax or for the maintenance of the income-producing source".
In the periods 2011 and 2012, the taxpayer A… recorded the accounting of invoices relating to supposed services provided by related company S… LDA, NIF …, as per the following extracts of movements:
[Table in original document]
As per some examples of documents in Annex 20, the majority of invoices respect computer maintenance services to the ethernet network infrastructure:
[Tables/examples in original document]
Now, the monthly periodicity of the invoices issued in 2011, for the amount of EUR 6,000.00 + VAT (EUR 7,380.00), as per the extract of movements above, evidences that this is a monthly service agreement contracted between A… and S…, whose invoice description points to the computer maintenance services described above.
The analysis of the content of the description of such invoices prompted a request for clarifications to A…, in the sense of presenting the service provision contract concluded with S…, which would support the charges made by such related company, as per Annex 21.
In response (see Annex 21), it was stated that "there is no written contract relating to the services that were provided to us by S…" (emphasis added).
Now, faced with the apparent absence of a contract, it was necessary that the taxpayer prove the services provided by such related entity, namely regarding invoice no. 1203590, of 28-09-2012 (FS-…-…), given the existence of other 2 invoices associated with documents FS-…-… and FS-…-…, so a new request was reiterated, as per Annex 21.
In truth, doubts are raised as to the reason for the issuance of invoice no. 1203590, in September 2012 (FS-…-…), whose description refers to "Service-Structured Network. Infrastructure Maintenance Service. Ethernet", when there are other 2 invoices (FS-…-… and FS-…-…) with the same description and covering the months of January to December 2012.
However, the following was stated by the Financial Director and Statutory Auditor:
"I have no tangible way to prove the realization of this service. I can only convey that, in November 2012, A… made the acquisition and installation of a new 'datacenter'. These equipments were awarded to the supplier at the same time that S… issued invoice 1203590 to us. That invoice respects the support of S… in identifying needs, defining the solution to adopt, analyzing proposals, as well as technical support in the phase of installation and startup of the new system".
Now, the "identification of needs", the "definition of the solution to adopt" and the "analysis of proposals" must be supported in reports issued by the service provider, so as to anchor such "needs" and the criteria and grounds of the proposals, in addition to evidencing the analyses and work carried out. In truth, it is not credible that, if such services existed, they are not reflected in reports to the contractor and that, after all, everything was reported verbally.
Furthermore, the possible provision of "technical support in the phase of installation and startup of the new system" should be of easy proof through the attendance records of S… employees at A…'s facilities and in "work sheets" where the provider would evidence the actual realization of such services.
However, neither analysis reports, nor records of the service provided by S… employees. A… states it has no "tangible way to prove the realization" of such service provision, whereby it is concluded by the non-existence of any documentary support that could attest to the authenticity of such recorded expenses.
However, it is stated that such services of supposed "computer assessment" are related to the prospecting for "the acquisition and installation of a new datacenter", which purchase materialized in November 2012. In truth, in this month, A… acquired computer equipment from company T… LDA, as per entry lM-…-…. To be true, it cannot fail to be noted that the acquisition of such equipment amounted to EUR 78,529.13 + VAT, as per the invoice of the supplier, and such prospecting services, even if added eventual "technical support", reach EUR 58,466.00, standing out an unjustified disproportion between such amounts.
On the other hand, it is strange that between companies of the size of A… and S… written contracts are not concluded, establishing all conditions for the provision of supposed services.
In fact, it is even more surprising that the non-existence of contracts is invoked, but in one of the invoices (FS-…-…) a reference is made to a discount of EUR 12,750.00 "relating to SLA failure as agreed" (see invoice in Annex 20). Now, "SLA" corresponds to "service level agreement", that is, the agreed level of service. And for certain levels of service to have been agreed, it is because, supposedly, they would have been established in writing in a service provision contract. However, A… attested (see Annex 21) that "there is no written contract relating to the services that were provided to us by S…" (emphasis added).
Thus, all the incongruities and inconsistencies referred to above lead to the perception that invoice no. 1203590, of 28 September 2012 (FS-…-…), issued by S… does not correspond to actual operations, because:
• S… is a company controlled by E… SGPS and by the family of F…, being a company with special relationships with A…;
• Similarly to S…, the company itself E… SGPS also issued invoices to A… for non-existent operations, as referred to in point III.4.1, above;
• The description of the assessment services supposedly carried out would necessarily imply the report of S… to the hiring party of the service (prospecting reports, proposal analysis reports, award proposal reports, among others);
• The actual realization of technical support services had to be supported in records in "work sheets" (number of employees, number of hours, validation by supervisors of the hiring party, among others);
• However, A… admitted it was unable to present any documentary evidence (contracts, reports, records of services provided, among others) that attested the realization of such services;
• The justification presented by A… of association of the assessment and technical support services, in the amount of EUR 58,466.00, with the acquisition of the "datacenter" is revelatory of a disproportion compared to the value of the equipment EUR 78,529.13, such that such disharmony indicates lack of authenticity;
• The statement that "there is no written contract relating to the services that were provided to us by S…" is incongruent with the allusion to "SLA failure", which supports a reduction of the price charged by S… in an invoice issued to A….
Thus, although the burden of proof regarding the indispensability of expenses does not rest, in first instance, with the taxpayer, it is imputable to him if the tax administration, acting under the principle of legality, groundedly, triggers doubt about the justified relationship of a determined expense with the activity of the taxpayer, as defended by the Decision of the Central Administrative Court of the South (TCAS), case no. 05312, of 27 March 2012.
Thus, it shall be incumbent on the taxpayer "necessarily and logically, as it is better positioned to do so (...), requiring, yes, that the taxpayer allege and prove concrete facts, susceptible of verification, capable of demonstrating the reality, veracity, of the business actions causing the recorded expenses (...)" (in Decision TCAS, case no. 05312, of 27 March 2012).
Given the foregoing, although the expenses are supported by invoices issued by S…, the indispensability and authenticity thereof are not duly proven, as it was necessary to dispel doubts about the actual provision of services by S… and to confirm their connection with the activity of A….
Thus, given the foregoing and under the terms of article 23 of the CIRC, it is necessary that the taxpayer proceed to add the amount of EUR 58,466.00 to field 752 of section 07 of the IRC model 22 income tax return for the period 2012.
III.2.9. Summary of corrections to taxable profit
Given the corrections proposed, described in points III.2.1 to III.2.8, above, the taxable profit declared by the taxpayer, in the periods of 2011, 2012, 2013 and 2014, will be revised to EUR 1,988,184.01, EUR 4,898,558.62, EUR 6,547,901.89 and EUR 3,820,557.83, respectively, as per the following table:
[Table in original document]
(...)
IX. RIGHT OF HEARING – GROUNDS
(...)
IX.2. APPROACH TO THE TAXPAYER'S RESPONSE
On 26 October 2015, the Taxpayer A… SA's exercise of the right of hearing was received by the Tax Inspection Services of the Directorate of Finance of …, as per document in Annex 23.
After an introductory part (points 1 to 6 of Annex 23), the taxpayer argues that "there is in the proceedings no indication of intent to defraud by the Claimant, a condition essential for there to be a crime" (see point 7 of Annex 23), also alluding to the principle of the truthfulness of the taxpayer's declaration, under the terms of article 75 of the LGT (see point 8 of Annex 23), and to the fact that the financial statements were audited without any emphasis or reservations (see point 9 of Annex 23).
Now, as to intent, it is obviously tacit through the use/accounting of invoices for non-existent operations, with possible objectives of reducing the taxation of profits, the improper deduction of VAT tax and/or the attempt to justify the withdrawal of monetary means from the company. On the other hand, the presumption of no. 1 of article 75 of the LGT is, obviously, rebuttable, as provided for in no. 2 of the same article, and the fact that legal certification of accounts contains no emphasis or reservations does not attest to the lawfulness of all operations recorded in the accounting of the taxpayer, due to the sampling analysis carried out by such auditors.
In this sense, and given the absence of any new elements presented by the taxpayer in the context of this counter-argument, the position of raising a notice of criminal tax fraud shall be maintained, as described in points VII.2.2, above, and VII.3.2, above.
In point 14 of Annex 23, the taxpayer contests the corrections in the context of IRC concerning the disregard of the transition adjustments for the purposes of the transitional regime POC/SNC, namely those relating to the recognition of provision for customer warranties and the derecognition of deferred costs associated with indemnification to distributors, described in point III.2.1, above. However, the argument is limited to asserting that "it disagrees with the corrections proposed by AT because they have no legal support and are therefore improper".
Now, the legal grounds for the corrections were duly set out in point III.2.1, above, namely through article 5 of Decree-Law no. 159/2009, of 13 July, the need for compliance with accounting standards, as imposed by article 17 of the IRC Code, through AT Circulars duly explained, as well as through other tax provisions, such as Regulatory Decree no. 25/2009, of 14 September. Thus, such lack of "legal support" is not conceded, whereby the position assumed in point III.2.1, above, is maintained.
In points 15 to 38 of Annex 23, the taxpayer contests, on an aggregate basis, the corrections in the context of IRC concerning the disregard of the transitional regime of the classification of the provision for treasury application, as described in point III.2.1, above, as well as those relating to fair value adjustments in financial instruments, explained in point III.2.2, above, due to their identical nature.
The taxpayer contests the consideration by AT, in only 50%, of the provision for treasury applications within the scope of the transitional regime and of losses from fair value adjustment in securities held for trading, alluding to a decision of the Administrative Arbitration Centre (CAAD), in which the "guidance provided in the draft report" is contradicted (see point 30 of Annex 23). In points 31 to 35 of Annex 23, parts of such arbitral decision are transcribed, concluding the taxpayer that "fair value reductions of financial instruments should compete fully for the formation of taxable profit (see point 36 of Annex 23).
[The document continues with further arguments and legal analysis...]
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