Summary
Full Decision
ARBITRAL DECISION
Arbitral Decision (case 776/2014-T)
The arbitrators Prof. Doctor Tomás Cantista Tavares (arbitrator-president), Dr. Fernando Carreira de Araújo and Dr. José Rodrigo de Castro (arbitrators-ad hoc), designated respectively by the arbitrators-ad hoc, by the Claimant and by the Respondent to form the Arbitral Tribunal, constituted on 13/2/2015, agree as follows:
1. Report
Grupo A…, SGPS, S.A., NIPC …, filed a request for constitution of a collective arbitral tribunal, pursuant to the combined provisions of articles 2, no. 1, para. a), and 6, no. 2, para. b) of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter RJAT), wherein the Tax and Customs Authority (hereinafter TA) is respondent, with a view to the declaration of illegality of the acts of dismissal of the gracious objections to the self-assessments of Corporate Income Tax (IRC) for the years 2011 and 2012 and of partial illegality of these IRC self-assessments (and consequential surcharge) in the total amount of 1,905,324.08€, plus compensatory interest in accordance with legal terms.
The request for constitution of the arbitral tribunal was accepted by the President of the CAAD and followed its normal procedure, namely with notification to the TA.
Pursuant to article 6, no. 2, para. b) of the RJAT, the Claimant exercised the legal prerogative of appointment of arbitrator, having designated Dr. Fernando Carreira de Araújo; the TA appointed Dr. José Rodrigo de Castro as arbitrator; and both arbitrators designated Prof. Doctor Tomás Cantista Tavares as president arbitrator. All arbitrators communicated their acceptance within the applicable time-frame. The parties manifested no intention to challenge the designation of the arbitrators.
The collective arbitral tribunal was constituted on 13/2/2015.
The TA responded, arguing that the request should be judged unfounded.
On 27/4/2015 the meeting provided for in article 18 of the RJAT took place where the Claimant declared itself to forgo the production of witness evidence and the Parties agreed that oral arguments would be made, which were delivered subsequently on that same day.
The arbitral tribunal was duly constituted and is materially competent, as provided in article 2, no. 1, para. a) and 4, both of the RJAT.
The parties possess legal personality and capacity, are entitled to participate and are represented (articles 4 and 10, no. 2, of the same decree and articles 1 to 3 of Order no. 112-A/2011, of 22 March).
The case does not suffer from procedural nullities and no exceptions were raised.
There is no obstacle to the examination of the merits of the case.
2. Facts
2.1. Proven Facts
Based on the elements contained in the case file (administrative case, facts agreed upon by the parties and reliable and uncontested documents), the following facts relevant to the decision are considered proven:
a) In 2011 and 2012, the Claimant formed part, for purposes of IRC taxation, of a tax group subject to the special tax regime for groups of companies (RETGS), provided for in articles 69 et seq. of the CIRC, of which it was the holding company;
b) The Claimant timely filed the IRC income statement model 22 for 2011 and 2012 for the group of companies;
c) During the years 2011 and 2012, the Claimant held a financial interest of less than 5% in the capital of B... SGPS, SA (formerly denominated C… SGPS, SA and D… SGPS SA), a listed company, at the date of the facts relevant in this case, on the regulated market that is the Lisbon Stock Exchange (Euronext Lisbon);
d) In 2011 and 2012, the aforementioned interest was measured for accounting purposes at fair value through profit or loss and recorded in an item of "Financial Investments measured at fair value through profit or loss";
e) Until 2009, and for tax purposes, such interest was recorded at its respective acquisition cost (historical cost) and not at fair value, in accordance with the criteria defined at that time by the Official Accounting Plan (POC);
f) Following the adoption of the Accounting Standardization System (SNC), the Claimant proceeded to record the capital shares in question at their fair value, this being also the criterion used for tax purposes;
g) In 2010, upon transition to the Accounting Standardization System, the Claimant, having a latent negative value variation of 23,196,890.00€, corresponding to the difference between the acquisition value of its interest in B... SGPS and its official quotation on the relevant date, recorded it in equity items;
h) The Claimant, in the self-assessments of 2011 and 2012, considered only half both the annual loss (1/5) corresponding to the application of the transitional regime provided for in article 5 of Decree-Law no. 159/2009 of 13 July in the aforementioned amount, as well as in function of the negative adjustment in 2011, resulting from the application of the fair value method to financial interests in listed entities of less than 5% of capital (article 18, no. 9, para. a), of the CIRC), by the interpretation made at that time of article 45, no. 3, of the CIRC (and in light of binding guidance information to that effect).
k) The Claimant timely filed a gracious objection to the self-assessments of 2011 and 2012, wherein it argued, on various grounds, for the complete tax deduction of those losses from reduction in fair value of the quotation of B... SGPS – and not merely 50% as it had initially done in the self-assessments of those years.
l) On 25/8/2014, the Claimant was notified of the express dismissal of the gracious objections, by Decisions made on 22/8/2014 by the Honourable Head of the Tax Justice Division of the Viseu Finance Directorate.
m) Dissatisfied, the Claimant filed a timely request for constitution of the arbitral tribunal which gave rise to the present case.
n) The parties disagree on the legal question inherent to the present case, but agree on the amounts at issue (resulting from the quotations of B... at the end of each year, negative patrimonial variation of the transitional regime and in the acquisition costs of the package of shares of B... held by the Claimant).
o) In 2011, should 100% of the loss from reduction in fair value be tax deductible, the additional amount considered as tax-deductible expenses, by application of the transitional adjustment and variation of the quotation in the period, amounts to 4,639,378.00€ and 3,817,646.00€, respectively, which totals the amount to be reimbursed to the Claimant of 1,226,268.48€ (IRC, surcharge and state surcharge).
p) In 2012, should 100% of the loss from reduction in fair value be tax deductible, the additional amount considered as tax-deductible expenses, by application of the transitional adjustment, amounts to 4,639,378.00€, which totals the amount to be reimbursed to the Claimant of 679,055.60€ (IRC, surcharge and state surcharge).
2.2. Unproven Facts
There are no facts with relevance to the examination of the merits of the case that have not been proven.
2.3. Justification for the Determination of Facts
The proven facts are based on the documents presented by the parties (which are documents issued by the Finance authorities and income statements), on the consensus of the parties (also regarding the values and measurements at issue) and on official information attached to the case file.
3. Law
3.1. Question to be Decided
As accepted by the parties, the question raised in the present proceedings concerns only the tax treatment to be given to losses resulting from the application of the fair value model in financial instruments, the counterpart of which is recognized through profit or loss, by interpretation and application of article 5 of Decree-Law no. 159/2009, article 18, no. 9 and article 45, no. 3, of the CIRC.
Specifically, the Claimant, in the years in question, held a financial interest of less than 5% in a listed company, the depreciation of fair value (by negative fluctuation in annual quotation and by the application, in 2011 and 2012, of the transitional regime described in article 5 of Decree-Law no. 159/2009 [1/5 of the reduction in fair value at 1/1/2010, compared to acquisition cost]) is a tax expense of the year at 100%, as the Claimant advocates (in this arbitral action and in the objection to the self-assessment that preceded it), or is it only relevant by half, at 50%, as the TA argues.
In other words: the question to be decided is whether the losses (at the date of transition from POC to SNC and in the exercise of the fair value method) resulting from the reduction in the quotation of the shares of B... SGPS, duly accounted for in accordance with the applicable fair value criterion, and recognized in profit or loss, should be taken into account in their entirety, or only 50%, by interpretation and application of article 18, no. 9, of the CIRC and particularly article 45, no. 3, of the CIRC.
3.2. Applicable Law
By rule, in IRC matters, losses are recorded (deductible) for tax purposes when the underlying assets are realized, particularly by disposal, regardless of the receipt of payment (article 18, nos. 1 and 2, of the CIRC).
However, potential or latent losses were recorded in asset provisions, since Decree-Law no. 35/2005, of 17 February, called adjustments in the POC, in account 6841 – Adjustment of Treasury Applications – Tradable Securities with the counterpart of account 195 – Adjustment of Treasury Applications – Tradable Securities and were not accepted for tax purposes under article 34 of the Corporate Income Tax Code (now article 39 of the Corporate Income Tax Code), in the version effective until 31 December 2013, although in its title they refer to provisions and not also adjustments.
The Accounting Standardization System (SNC) altered, in part, this principle – that only realized losses are tax-deductible expenses – permitting, in some cases, the recording of accounting profits and losses, in light of mere annual fluctuation in the value of assets, regardless of realization – the fair value standard, recorded as losses in the SNC, respectively in accounts 661 – Losses from reductions in fair value – In financial instruments directly against account 1421 – Other Financial Instruments, Financial Instruments Held for Trading – Financial Assets.
The tax law, in incorporating the SNC for tax purposes, opted through Decree-Law no. 159/2009, for very limited acceptance of fair value taxation for certain assets of any companies (where it was previously an exceptional measure for some sectors [for example insurers] and complex products [derivatives]).
One of the cases, perhaps the most emblematic, is contained in article 18, no. 9, para. a), of the CIRC which imposes, in breach of the realization rule, the annual tax recognition of the mere variation (positive or negative) in the value of an asset – a financial instrument – in the present case, an interest of less than 5% of the capital of a company whose securities are traded on an organized market (on a stock exchange).
No. 9 of article 18 of the same Code provides that:
"The adjustments resulting from the application of fair value do not contribute to the formation of taxable profit, being attributed as income or expenses in the tax period in which the elements or rights that gave rise to them are disposed of, exercised, extinguished or liquidated, except when:
a) They relate to financial instruments recognized at fair value through profit or loss, provided that, if they are instruments of equity, they have a price formed in a regulated market and the taxpayer does not hold, directly or indirectly, a participation in capital of more than 5% of the respective capital; or
b) This is expressly provided in this Code".
It is, in fact, a free choice of the tax legislator of 2010: faced with the introduction of the SNC (from 2010 onwards), it adopts this accounting standard for tax purposes, in the case of a loss from reduction or gain from increase in fair value, among other cases, in non-significant interests (less than 5%) of listed companies (where the quotation is certain and reliable given the absence of a transaction price).
On the other hand, article 5 of Decree-Law no. 159/2009 created a transitional provision consistent with that rule: in what is relevant for our case, it provides that the negative fair value upon the entry into force of the SNC (difference between the acquisition cost of the interest and the quotation of the security at 31/12/2009) be distributed over five years, contributing as a tax cost a proportional quota (1/5) in each of the following years – among which, in 2011 and 2012.
Article 45, no. 3 of the CIRC – the central provision of the interpretative disagreement between the parties, wherein the Claimant advocates its non-application to the case at hand, unlike the TA – reads as follows:
"The negative difference between capital gains and capital losses realized through the onerous transfer of capital shares, including their redemption and amortization with capital reduction, as well as other losses or negative patrimonial variations relating to capital shares or other components of equity, namely supplementary contributions, contribute to the formation of taxable profit in only half of their value." (italics are ours).
It should be noted that this provision suffered no alteration in its legal wording, when the profound reform of the CIRC undertaken by Decree-Law no. 159/2009, which adapted the CIRC to the new accounting standard of the SNC (approved by Decree-Law no. 158/2009), was implemented.
3.3. Arguments of the Parties
The Claimant invokes, in summary, that these losses of fair value from accounting depreciation of the securities representing the capital of B... SGPS are accepted for tax purposes by meeting the requirements of article 18 no. 9, of the CIRC (and article 5 of Decree-Law 159/2009) and are accepted at 100% (in full), because article 45, no. 3 of the CIRC does not apply to fair value losses, but only where realization exists, based on literal arguments (analysis of the wording of article 45, no. 3, of the CIRC), historical-systemic arguments (given the legal immobility of this provision upon the introduction of fair value in tax terms) and teleological arguments (grounded in the purpose of article 45, no. 3, of the CIRC [i) which aims to combat "tax evasion" by opportunism in recording costs, via sale of capital shares in profitable years, which does not occur in the fair value model, wherein the taxpayer's will does not model the fair value; ii) it would not be lawful to provide a different regime for fair value gains and losses (taxation in full and by half, respectively), when the taxpayer's will does not interfere with the taxable event]. That is, article 45, no. 3, of the CIRC would only be intended for losses and capital losses sustained under the realization model, accepted for tax purposes only at 50% of their amount, with capital gains also being taxed at the same 50%, in the case of reinvestment under article 48 of the same code.
The TA refutes these arguments, based equally, and in summary, on literal, historical-systemic and teleological arguments (and introducing doctrine in favor of its position).
According to the literal argument, when article 45, no. 3 of the CIRC specifically refers to "other losses or negative patrimonial variations relating to capital shares or other components of equity (...), contribute to the formation of taxable profit in only half of their value", it would be encompassing situations such as those at hand, requiring that the negative patrimonial variation in question contribute to the formation of taxable profit in only half of its value.
As to the historical-systemic argument: according to the TA, the absence of alterations in the wording of article 45, no. 3, of the CIRC (upon the tax reform of incorporation and tax adaptation of the SNC and exceptional taxation of fair value) reveals only that it was not intended that the regime in question suffer any restriction, in light of the alterations introduced in the accounting system, because the tax limitation of losses (now allegedly encompassing also those of fair value) would already be included in that provision, especially since there were already other cases in the law of fair value taxation – and thus there was no need for alteration of the wording of the provision.
As to the teleological argument: it states that article 45, no. 3 of the CIRC is a provision that pursues revenue collection reasons and was as such (in its original wording) not declared unconstitutional by the Constitutional Court (Decision 85/2010) – maintaining such ratio in the tax acceptance, in only half, of fair value losses accepted for tax purposes; in addition to the difficulty in concatenating the complete deduction of fair value with the deduction by half of the capital loss realized upon the subsequent disposal of such assets.
3.4. Decision
The arbitrators analyzed all the rhetoric adduced by the parties (in their written submissions and arguments), as well as the reasoning and consideration of the arbitral decision given in a case with similar contours (Decision 108/2013-T), but always keeping in mind the minor alterations of the case ("each case is its own").
After mature deliberation, they decide in the sense of the Decision of Case 108/2013-T, following henceforth, with due deference, the essential reasoning of that decision.
Article 18, no. 9, of the CIRC (and article 5 of Decree-Law no. 159/2009) undoubtedly applies to the case at hand, with the taxation of the fair value annually (2011) and transitional regime (2011 and 2012) of the fluctuations in quotation of the interest of less than 5% in B... SGPS SA (the parties agree on this and on the values at issue, whether the losses recognized for tax purposes are in half or in their entirety).
The point of disagreement lies in the interpretation and application of article 45, no. 3, of the CIRC.
The current article 45 no. 3 of the CIRC results from the renumbering of the former article 42 no. 3, carried out by Decree-Law no. 159/2009, which, in turn, was introduced by Law 32-B/2002, of 30 December, with the following wording:
"The negative difference between capital gains and capital losses realized through the onerous transfer of capital shares, including their redemption and amortization with capital reduction, contribute to the formation of taxable profit in only half of their value.".
In accordance with the Report of the Ministry of Finance for the 2003 State Budget (p. 33), the legislative intervention in the area in question (IRC) was guided by "two priorities, namely, the fight against fraud and tax evasion and the broadening of the tax base.", with the alteration of interest being encompassed within the scope of "Broadening of the tax base and measures of moralization and neutrality" (p. 51).
The current wording of the provision under analysis resulted from the alteration implemented by Law 60-A/2005 of 30 December, and in accordance with the corresponding Report of the Ministry of Finance (p.31), the measure in question was encompassed within the scope of "the fight against tax evasion and fraud and other measures directed at budgetary consolidation".
No. 9 of article 18 of the CIRC obtains its justification directly in the preamble to Decree-Law no. 159/2009, of 13 July, which introduced it in the said Code, where it can be read:
"Still in the field of approximation between accounting and taxation, the application of the fair value model to financial instruments, whose counterpart is recognized through profit or loss, is accepted, but only in cases where the reliability of the determination of fair value is in principle assured. Thus, instruments of equity that do not have a price formed in a regulated market are excluded. Furthermore, the application of the realization principle is maintained in relation to financial instruments measured at fair value whose counterpart is recognized in equity, as well as capital shares that correspond to more than 5% of capital, even if recognized at fair value through profit or loss. (...)
These expressed intentions have correspondence in that provision of no. 9 of article 18, as well as in the introduction, by the same legal instrument, of paragraphs f) and i) of no. 1 of articles 20 (income and gains) and 23 (expenses and losses) of the CIRC, as well as paragraph b) of no. 1 of article 46 of the CIRC (concept of capital gains and capital losses).
Within the set of alterations introduced by the said Decree-Law no. 159/2009 it should also be noted that where previously there was talk of profits and gains (article 20), now there is talk of income, and where previously there was talk of costs (article 23), now there is talk of expenses.
The taxation of the fair value of article 18, no. 9, of the CIRC (from 2010 onwards) – with the tax acceptance of part of the accounting fair value – represents a tax break with the past, where taxation (taxable event) necessarily presupposed an act of realization or transfer (removing exceptional cases, merely residual, in certain sectors and for complex products).
All companies, any company, that has an interest of less than 5% in a listed company will now be taxed by the fluctuation (positive or negative) in the value of that financial instrument, regardless of its transfer (and generation of money to pay the tax).
Before 2010, prior to the adoption of fair value, positive or negative value fluctuations relating to financial instruments were irrelevant from the point of view of the formation of the taxable profit of each period, by effect of the provisions of articles 21 and 24 of the CIRC. Only at the moment of realization of the capital gain or loss did the patrimonial variation verified assume tax relevance.
The connection of the taxable event to realization (transfer) had (as it has, in the part in which it is maintained) three well-marked characteristics, namely:
· It is a unique taxation: it occurs only once (with the sale) despite the entire period of holding of the financial instruments (and the formation of income over time);
· It depends on a voluntary action of the taxpayer (act of sale or transfer): the verification of the taxable event depends absolutely on a decision by the taxpayer.
· The measurement of the patrimonial variation is fixed in function of the concrete transaction that triggers its tax relevance.
The combination of these three characteristics provides fertile ground for undesired accounting and tax manipulation: the taxpayer, by free exercise of his liberty (decision to sell or not sell), conditions whether and how much tax is owed. And naturally opts to trigger the taxable event at the moment and on the terms that would be fiscally most beneficial. It retains the interest with potential appreciation and is not taxed (or sells it in deficit years); and especially, if depreciated, sells it in profitable years – recording a capital loss fully deductible and thus paying less IRC. Being certain that it could subsequently acquire an equal interest on the market, thus maintaining the same economic interest in the investee company...
It is in this context that the emergence of the provision of the former article 42 no. 3 of the CIRC (later article 45 no. 3, of the CIRC) is explained – with the acceptance of capital losses and losses relating to capital shares and other negative components of equity in only half of their value.
Such provision, whether in its primitive wording, resulting from Law 32-B/2002, of 30 December, or in that given to it by Law 60-A/2005 of 30 December, is explained objectively and subjectively (that is, in light of the motivation expressed by the legislator) by needs linked to the fight against fraud and tax evasion and the broadening of the tax base, directed at the desired budgetary consolidation of public accounts.
The taxation of the fair value model in financial instruments, operated by Decree-Law 159/2009, of 13 July (in its article 5 and article 18, no. 9, para. a) of the CIRC) introduced a radically different model: the taxpayer's will is irrelevant, we would even say totally irrelevant for the formation and quantification of income or expense, which is associated exclusively with the holding and fluctuation in the value of the quotation in the period, regardless of liquidity to pay the tax.
The tax legislator, however, did not embrace this model comprehensively. The general rule of taxation based on realization is maintained – for all assets and also for financial instruments (outside the narrow requirements of article 18, no. 9, para. a), of the CIRC), see article 46, no. 1, para. b) of the CIRC.
As to "financial instruments" that correspond to less "than 5% of capital", "whose counterpart is recognized through profit or loss, (...) in cases where the reliability of the determination of fair value is in principle assured", the legislative intention was to accept "the application of the fair value model", excluding the principle of realization – thus constituting the exception and not the rule.
The wording of the law (article 18, no. 9, of the CIRC) is peremptory:
Thus, by rule, even "The adjustments resulting from the application of fair value [accounting] do not contribute to the formation of taxable profit, being attributed as income or expenses in the tax period in which the elements or rights that gave rise to them are disposed of, exercised, extinguished or liquidated." This is the maintenance of the tax regime rule of realization.
However, the same provision, in its paragraph a), establishes the exception to this regime, in the following terms: "except when: a) They relate to financial instruments recognized at fair value through profit or loss, provided that, if they are instruments of equity, they have a price formed in a regulated market and the taxpayer does not hold, directly or indirectly, a participation in capital of more than 5% of the respective capital;".
That is, and equally as assumed by the legislative entity, when the "income or expenses (...) relate to financial instruments recognized at fair value", "contribute to the formation of taxable profit" "provided that":
a. They are recognized "through profit or loss";
b. They are "instruments of equity";
c. "have a price formed in a regulated market"; and
d. "the taxpayer does not hold, directly or indirectly, a participation in capital of more than 5% of the respective capital.".
Meeting these conditions:
a. income from the application of fair value in financial instruments are considered (article 20 no. 1, para. f) of the CIRC); and
b. expenses from the application of fair value in financial instruments are considered (article 23 no. 1, para. j) of the CIRC).
In this way, where previously we had a unique tax relevance (one-off), upon the transaction of those instruments, ascertained by deducting the realization value from the historical acquisition cost (possibly revalued by application of currency devaluation coefficients), now we have a continued tax relevance (fluctuation in annual quotation compared to the acquisition value or the closing date of the previous year), regardless of the transaction). That is, given the new provisions comprising the regime of tax relevance of the accounting at fair value of financial instruments, income (recorded in account 771 – gains from increases in fair value – financial instruments) or expenses (recorded in account 661 – losses from reductions in fair value – financial instruments) resulting from the application of fair value (annual fluctuation in quotation) now directly contribute to the formation of taxable profit (articles 20/1/f) and 23/1/j) of the CIRC) of that very year in which they occur, provided that certain conditions are met (article 18/9 of the CIRC), which include the formation of the price in a regulated market, with patrimonial variations recorded as capital gains or capital losses (article 46, no. 1, para. b), of the CIRC) not being taxed.
In this framework, there cease, manifestly, to be any needs relating to the fight against fraud and tax evasion, not only because the tax relevance of patrimonial variations ceases to be conditioned by an act of will of the taxpayer, but also because the measurement (yesterday as today) is objectively fixed.
On the other hand, and for the same reasons, any measure to condition the will of the taxpayer also lacks sense, with a view to favoring economically more "desirable" behaviors and, as such, conforming to the interests of broadening the tax base and budgetary consolidation.
The difference is that in the time of the POC, the legislator, in the same way as it did not accept the tax relevance of losses recorded via constitution of provisions or adjustments, contrary to the principle of partial dependence of taxation on accounting, did not tax gains, while today, in the time of the SNC, it accepts the tax relevance of both, deducting or taxing them, accepting the aforementioned principle, although with the limitations previously noted, bringing taxation closer to accounting as was the expressed objective of the legislator.
Notwithstanding all the alterations introduced by Decree-Law 159/2009, of 13 July, the former article 42 no. 3 of the CIRC, renumbered as article 45 no. 3, maintained its validity, with its unchanged wording, despite the accounting alterations that occurred, of which we have already given notice.
Hence the question, as occurs in the proceedings at hand, whether such provision will apply, or not, to losses relating to financial instruments accounted for that contribute to the formation of taxable profit, pursuant to article 18, no. 9, para. a) of the CIRC (and article 5, of Decree-Law no. 159/2009).
Careful and coordinated reading of the norms relevant to the analysis of the case leads to the conclusion that article 45, no. 3, of the CIRC does not apply to the case at hand.
Analysis of this provision, in accordance with the Decision of Case no. 108/2013-T of the CAAD, reveals that the legislator chose, for inclusion therein, three types of situations which should be considered distinct, in function of the presumption of good legislative technique, namely:
a. "The negative difference between capital gains and capital losses realized through the onerous transfer of capital shares";
b. "other losses (...) relating to capital shares or other components of equity";
c. "other (...) negative patrimonial variations relating to capital shares or other components of equity".
Let us then see whether the situation at hand is subsumed under any of the listed situations.
The situation alluded to under paragraph a) above will be manifestly inapplicable, not only because there was no realization through onerous transfer, but because article 46 no. 1, para. b) of the CIRC excludes the situations described in article 18, no. 9, para. a) of the CIRC from the concept of realized capital gains.
It remains then to analyze the situations listed in paragraphs b) and c) above. The apparent indiscriminate breadth of these provisions is mitigated if one notes that "losses" (para. b) above) and "other negative patrimonial variations" (para. c) above), are not redundant concepts but endowed with their own distinct sense.
To understand this fact, it will be necessary to analyze articles 23 and 24 of the CIRC, paying attention to the terminological evolution operated by Decree-Law no. 159/2009.
In fact, before the entry into force of the latter decree-law, the aforementioned articles of the CIRC provided, respectively, that:
· "The following shall be considered costs or losses those which are demonstrably indispensable for the realization of the profits or gains subject to tax or for the maintenance of the source of income, namely the following: (...)";
· "Under the same conditions referred to for costs or losses, also contribute to the formation of taxable profit the negative patrimonial variations not reflected in the net profit for the period, except: (...)".
It is verified, in this manner, that when the current wording of article 45 no. 3, of the CIRC was established, this Code distinguished expressly, for what is relevant here, three types of situations, namely: Costs; Losses; Negative patrimonial variations not reflected in the net profit for the period.
The provision of article 42, no. 3, of the CIRC (predecessor of the current article 45, no. 3), should be considered, thus, as referred to such concepts, defined in articles 23 and 24. In this way, and for obvious reasons, from the provision of that norm expenses relating "to capital shares or other components of equity" should be excluded, with only losses (as defined in article 23) and negative patrimonial variations (as defined in article 24) relating to those shares being included.
And that this is so, that is, that the expression "other losses or negative patrimonial variations" used in the current article 45, no. 3, of the CIRC does not today as yesterday have an indiscriminately comprehensive sense, as would be the case if it used the expressions costs and expenses (which would include losses as defined in paragraph 76 of the SNC conceptual framework), but rather a fiscally precise sense, defined in articles 23 and 24, results directly from the fact that the legislator used the same distinction, not considering within the scope of the article all expenses (then costs), but only losses, which presuppose the disposal or extinction of the asset underlying the transaction, save for the assimilations expressly provided for in law.
Furthermore, inclusion within the scope of the provision in question, not only of losses (as defined in article 23) and negative patrimonial variations (as defined in article 24), but also of costs, would lead to that after 2009, with the entry into force of the SNC, for example, the acquisition cost of capital shares would only contribute half its value to the determination of taxable profit, which would be, obviously, inconceivable to any minimally reasonable legislator.
The normative alteration implemented by Decree-Law 159/2009, of 13 July, altered nothing of relevance in the matter in question. In fact, notwithstanding the body of article 23 having come to refer solely to expenses, the fact is that, in the version effective until 2013, the CIRC uses the expression "expenses" included in article 23 itself (see no. 1, paragraph i) when referring to the application of fair value in financial instruments, so, by greater reason, article 45, no. 3, of the CIRC does not apply to these.
And even if after the alterations that occurred in 2014, the title of the article comes to be "expenses and losses", including in the article itself "losses from reduction in fair value" (no. 1, para. h), this occurring in coherence, moreover, with the SNC, which pursuant to point 2.1.3.e) of the annex to Decree-Law 158/2009 of 12 July, maintains the distinction between "expenses" and "losses", including the latter in the former, the truth is that in a literal interpretation as proposed by the TA, pursuant to article 45, no. 3, of the CIRC, not all losses relating to financial instruments are relevant, but only those relating to capital shares.
In this way, it is concluded that article 45, no. 3 of the CIRC refers to:
a. negative differences between capital gains and capital losses realized through the onerous transfer of capital shares;
b. other losses relating to capital shares or other components of equity; and
c. other negative patrimonial variations relating to capital shares or other components of equity.
Being that by "losses" should be understood the facts qualifying as such in light of the CIRC in the version effective at the date (2011 and 2012) and by "negative patrimonial variations" should be understood negative patrimonial variations not reflected in the net profit for the period, as defined in article 24.
Not included within the scope of the provision in question, accordingly, are facts qualifying as "expenses," in light of the CIRC, whether relating to capital shares or other components of equity – which occurs, in the version at the date of the facts, in respect of "expenses resulting from the application of fair value in financial instruments" (article 23, no. 1, para. i) of the CIRC) – the situation at hand, referred to by article 18, no. 9, para. a), of the CIRC, which also refers to "expenses" and not to "losses".
In any event, if there were doubt, were the legislator, upon the entry into force of Decree-Law 159/2009 of 13 December, to intend to encompass the situations listed in article 18, no. 9, para. a) of the CIRC, within the scope of article 45, no. 3 of the same, it would either have altered that latter provision, indicating that it would encompass the expenses resulting from the application of fair value in financial instruments or it would have given different wording to article 23, no. 1, para. i) of the CIRC by expressly stating that fair value adjustments are designated as "losses" and not as "expenses", which it only did in 2014, without prejudice to the above.
In summary: the literal argument favors the interpretation according to which the negative fluctuations in fair value in the cases of article 18, no. 9, para. a) of the CIRC will be a complete tax expense of the year – and not merely half.
This interpretative result (established by Decree-Law no. 159/2009) is moreover that which best accords with the general relationship of dependence (identity) between accounting and taxation; between the result proposed by accounting – and its identity with the tax result.
In other words, any distortion and difference between the result proposed by accounting and the respective tax solution must be contained in a precise tax norm, which autonomizes it expressly and undoubtedly.
This is what occurs, manifestly, with the tax acceptance only by half of realized capital losses of capital shares. But the wording of the law – and the legal expressions – are not identical with respect to the negative fluctuations in fair value, between article 45, no. 3 of the CIRC on the one hand and article 18, no. 9, para. a), of the CIRC (and article 23, no. 1, para. i), CIRC), on the other. And the systematics of the CIRC, in the relationship of dependence (identity) between accounting and taxation – should provide the same result in both aspects, when nothing is expressly stated to the contrary (as is the case at hand).
Finally, the teleological element also favors the consideration for tax purposes at 100% of the negative adjustments in fair value – and not application in that scenario (as occurs at hand) of article 45, no. 3, of the CIRC.
As was seen, the regime for which the provision of article 45, no. 3, of the CIRC was thought and instituted (the realization of capital losses, and other situations listed) was dependent on a voluntary action of the subject, with the intent of effecting them when it pleased him, by exclusive act of his will (as a measure of minimization of the tax burden). Now, in this framework, it will be understandable that the legislator establish mechanisms of disincentive to action susceptible of being considered as undesirable, in this case the realization of capital losses or other negative patrimonial variations. By providing that such situations will only be relevant by 50% of the recorded amount, the tax legislator is, objectively, conditioning the actions encompassed by the legal provision, imposing a negative incentive to the same.
On the other hand, and in the case of assets of value not objectively quantifiable, the disregard at 50% of the negative patrimonial variations verified, would also have a function of "compensating for" the natural tendency of economic operators to, at the tax level, inflate losses.
None of this occurs in the cases of article 18, no. 9, para. a) of the CIRC: being in the presence of adjustments resulting from the accounting at fair value, determined by objective criteria (with "a price formed in a regulated market"), there is no doubt or intervention of the taxpayer's will in the verification of the negative or positive patrimonial adjustment. That is, these will occur or not, regardless of the action and the will of the taxpayer.
Now, to penalize, in these cases, the taxpayer with a disregard of 50% of the expense incurred, would be entirely unjustified, whether from an economic or legal point of view – and would frustrate the essential reason of the command contained in article 45, no. 3, of the CIRC.
Thus, article 18, no. 9, para. a) of the CIRC, by removing the situations provided therein from the scope of the principle of realization, also removes them from the constraint of article 45, no. 3, of the CIRC, justifying, for those cases, a regime of complete taxation of fair value, whether positive or negative, in obedience to literal, systematic and teleological arguments.
It should be noted, finally, that these same arguments justify the complete tax deduction of the transitional tax adjustment resulting from the depreciation of the interest in question upon the entry into force of the SNC. To which is added the crucial argument of coherence and unity of the system: that could not provide a different tax result for the negative fair value of the year and a different tax result for the transitional adjustment, when there are no attainable reasons that would impose a different solution.
In these terms, the Claimant's claim deserves to be upheld, as article 18, no. 9, para. a) of the CIRC imposes the contribution "to the formation of taxable profit", without reservations or limitations, of the "income or expenses" which "(...) relate to financial instruments recognized at fair value", "provided that" they are recognized "through profit or loss"; they are "instruments of equity"; "have a price formed in a regulated market"; and "the taxpayer does not hold, directly or indirectly, a participation in capital of more than 5% of the respective capital" (as occurs at hand). In this case, the limitation provided for in article 45, no. 3 of the CIRC does not apply, insofar as they are not encompassed by its normative provision.
4. Compensatory Interest
The taxpayer has the right to compensatory interest when there is an error in the assessment (self-assessment) attributable to the services – and from which error has resulted the payment of an amount of tax (self-assessed) greater than that legally due – article 44 of the LGT.
In its self-assessments of 2011 and 2012, the claimant considered those negative adjustments at only 50% of their value, following the orientation contained in binding guidance information on this exact same subject, the decision of which is wrong, as determined by the present decision.
Now, this fact is sufficient to consider that there is an error in the self-assessment attributable to the services, which determines the payment of compensatory interest in favor of the taxpayer, counted from the legal annual deadline for reimbursement of self-assessed IRC (article 104, no. 3, of the CIRC) until complete payment.
5. Decision
In accordance with the above, the members of this Arbitral Tribunal agree to:
a. Judge the claim for declaration of illegality of the act of self-assessment of IRC committed by the Claimant for the years 2011 and 2012 well-founded, due to incorrect application of the regime of article 45, no. 3, of the CIRC, which constitutes a defect and violation of law, due to error in the legal premises.
b. Judge the claim for declaration of illegality of the gracious objection to the self-assessments in question well-founded, for having incurred in the same defect of violation of law, by not granting the claim therein formulated by the Claimant
And consequently:
c. Determine that, in 2011, the complete tax acceptance of the loss from fair value in question is accepted (by transitional adjustment and variation in quotation in the period, of 4,639,378.00€ and 3,817,646.00€, respectively), which totals the amount to be reimbursed to the Claimant of 1,226,268.48€ (IRC, surcharge and state surcharge).
d. Determine that, in 2012, the complete tax acceptance of the loss from fair value in question is accepted (by transitional adjustment of 4,639,378.00€), which totals the amount to be reimbursed to the Claimant of 679,055.60€ (IRC, surcharge and state surcharge).
e. And condemn the TA to pay compensatory interest to the Claimant, on the amounts determined in the preceding paragraphs, from 1 September 2012 (paragraph c. above) and 1 September 2013 (paragraph d. above), until complete reimbursement.
6. Value of the Case
In accordance with the provision in article 97-A, no. 1, para. a), of the CPPT and no. 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at €1,905,324.08.
7. Costs
There is no place for the determination and distribution of responsibility for the costs of the proceedings, in accordance with no. 4 of article 22 of the RJAT.
Notice is given
Lisbon, 18 June 2015
The Arbitrators
Tomás Cantista Tavares (Arbitrator President)
Fernando Carreira de Araújo (Arbitrator-Ad Hoc)
Dr. José Rodrigo de Castro (Arbitrator-Ad Hoc)
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