Process: 780/2015-T

Date: June 20, 2016

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 780/2015-T) addresses whether special advance payments (Pagamento Especial por Conta - PEC) can be deducted from autonomous taxation under Portuguese IRC (Corporate Income Tax) law. The taxpayer A…, S.A. contested the Tax Authority's refusal to deduct €17,865.00 in PEC from €55,253.46 in autonomous taxation for fiscal year 2013. The claimant argued that Article 90(2)(c) of the IRC Code includes PEC among mandatory deductions from IRC assessment, and since autonomous taxation is an integral component of IRC under Article 45(1)(a), the PEC should be deductible from autonomous taxation amounts. The taxpayer contended that autonomous taxation, despite being an anti-abuse mechanism, remains IRC assessment and cannot be excluded from the deduction scheme. The Tax Authority countered that Article 90 does not authorize PEC deduction against autonomous taxation, which serves specific purposes including combating tax evasion, fraud prevention, and controlling undocumented expenses. The case highlights a fundamental interpretive dispute: whether autonomous taxation constitutes part of the IRC assessment base for purposes of applying the Article 90(2) deduction hierarchy, or whether it operates as a separate levy excluded from PEC deductibility. The taxpayer requested full or partial annulment of the self-assessment, reimbursement of €17,865.00, plus compensatory interest under Articles 43 and 100 of the General Tax Law for overpayment. This case has significant implications for corporate taxpayers regarding the interaction between PEC advance payments and autonomous taxation obligations.

Full Decision

ARBITRAL DECISION

I. REPORT

I.1

On 23 December 2015, the taxpayer A…, S.A., entity number…, with registered office at…– Building…, …, Room …, …-… …, requested, pursuant to the terms and for the purposes of Articles 2 and 10, both of Decree-Law No. 10/2011 of 20 January, the constitution of an Arbitral Tribunal with the designation of a sole arbitrator by the Deontological Council of the Administrative Arbitration Center, pursuant to the provisions of paragraph 1 of Article 6 of the aforementioned decree.

  1. The request for constitution of the Arbitral Tribunal was accepted by the Esteemed President of CAAD and was notified to the Tax and Customs Authority (hereinafter referred to as AT or "Respondent") on 4 January 2016.

  2. The Claimant did not proceed with the appointment of an arbitrator; accordingly, under the provisions of Article 5, paragraph 2, subparagraph b) and Article 6, paragraph 1, of the RJAT, the undersigned was designated by the Chairman of the Deontological Council of CAAD to serve in this sole Arbitral Tribunal, having accepted in accordance with the legally prescribed terms.

  3. The AT presented its response on 11 April 2016.

  4. By order of 15.04.2016, the holding of the hearing provided for in Article 18 of the RJAT was dispensed with and it was decided that the proceedings would continue with written final submissions.

  5. On 2 May 2016, the Claimant presented submissions.

  6. The Respondent presented its submissions on 16 May 2016.

  7. The Claimant requests that the Arbitral Tribunal declare the illegality of the dismissal of the administrative complaint no. …/15 and, likewise, the partial illegality of the self-assessment of Corporate Income Tax no. 2014…, for the fiscal year 2013, regarding the portion corresponding to the special payments on account made and available for deduction from autonomous taxation, in the amount of €17,865.00, with all legal consequences, namely the reimbursement to the claimant of this amount, plus indemnity interest.

I.A. The Claimant bases its request, in summary, on the following grounds:

  1. According to subparagraph a) of paragraph 1 of Article 90 of the Corporate Income Tax Code, when the assessment of such tax is to be carried out by the taxpayer in the periodic income tax declaration, the same is based on the taxable income contained in that declaration.

  2. Additionally, paragraph 2 of the same article provides that "to the amount determined in accordance with the preceding paragraph, the following deductions shall be made, in the order indicated:

a) that corresponding to the credit for tax on international double taxation;

b) that relating to tax benefits;

c) that relating to special payment on account;

d) that relating to withholding tax not subject to compensation or reimbursement in accordance with applicable legislation."

  1. Thus, as follows from the aforementioned provision, the special payments on account made constitute one of the deductions from the Corporate Income Tax assessment.

  2. In this regard, the AT argues that the aforementioned provision does not authorize that this deduction be made against the amount of autonomous taxation determined in the period.

  3. The Claimant does not agree with the non-deduction of the special payment on account from the amount of autonomous taxation.

  4. The autonomous taxation that applies to deductible expenses in Corporate Income Tax forms part of the regime and is owed by virtue of this tax and, as such, is covered by subparagraph a) of paragraph 1 of Article 45 of the Corporate Income Tax Code, in the version in force at the time (i.e., they are not deductible for purposes of Corporate Income Tax, as an integral part of this tax).

  5. In this context, the Claimant draws the conclusion that autonomous taxation is an integral part of the Corporate Income Tax assessment.

  6. The conclusion that autonomous taxation is Corporate Income Tax cannot lead to any other consequence than that autonomous taxation is an integral and inseparable part of the Corporate Income Tax assessment.

  7. Thus, the amount of the special payments on account that failed to be deducted due to insufficient Corporate Income Tax assessment (so-called normal) could, in fact, have been deducted up to the amount of autonomous taxation paid by the Claimant (since this amount should have been considered as an integral part of the Corporate Income Tax assessment).

  8. Accordingly, to the Corporate Income Tax assessment determined by the Claimant in the fiscal year 2013, by virtue of autonomous taxation, in the amount of €55,253.46, the amount of special payments on account made in that fiscal year, in the amount of €17,865.00, could have been deducted.

  9. The Claimant cannot accept that the AT now argues that express mention of autonomous taxation in Article 90 of the Corporate Income Tax Code is necessary for these to be included within the scope of deduction of special payments on account.

  10. If it were admitted that, for purposes of Article 90 of the Corporate Income Tax Code, autonomous taxation is not Corporate Income Tax, there would be no provision in the said Code that defined the manner of assessment of autonomous taxation.

  11. Within the Corporate Income Tax Code itself, there are several provisions that also have the nature of "anti-abuse rules," namely the thin capitalization regime that was provided for in Article 67 of that code at the time of the facts, which provided for a limitation on expenses incurred with excessive indebtedness.

  12. In the same measure, the legislator accepts the expenses incurred with indebtedness and penalizes expenses that result from indebtedness to the extent of the excess.

  13. The fact that it is an anti-abuse rule does not invalidate that the additional Corporate Income Tax assessment resulting therefrom (in the example in question, from the expenses resulting from the excessive part of the indebtedness) ceases to be considered "Corporate Income Tax assessment," and, consequently, ceases to be capable of being deducted from special payments on account.

  14. In this sense, the Claimant understands that, notwithstanding its nature as an anti-abuse rule, since autonomous taxation is an integral part of Corporate Income Tax and its assessment, and special payments on account are an advance payment of Corporate Income Tax, nothing prevents deductions of special payments on account from these.

  15. Based on all of the foregoing, the Claimant considers that the deduction of special payments on account from the Corporate Income Tax assessment (which, as has been noted, includes autonomous taxation) does not compromise the objectives of combating tax evasion that underlie the creation of autonomous taxation, contrary to the understanding of the AT in its decision dismissing the administrative complaint presented by the Claimant.

  16. The Claimant also requests that, by granting this request, it be paid, pursuant to Articles 43 and 100, both of the General Tax Law, the respective indemnity interest for payment of the tax obligation in an amount exceeding the legally due amount.

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

  1. The mechanism of autonomous taxation has been instrumentalized for the pursuit of diverse objectives, ranging from the original purpose of preventing practices of evasion and fraud—through confidential or undocumented expenses, or payments to entities located in jurisdictions with privileged tax regimes, to the replacement of taxation of fringe benefits in the form of representation expenses or allocation of vehicles to employees and members of corporate bodies, in the sphere of the respective beneficiaries—to the purpose of preventing the phenomenon known as "dividend washing" (cf. paragraph 11 of Article 88 CIRC) or of imposing, by way of taxation, the payment of income considered excessive (cf. paragraph 13 of the same provision).

  2. The autonomous character of these taxation, resulting from the special configuration given to the material and temporal aspects of the taxable events, imposes, in certain areas, the departure from or an adaptation of the general rules of application of Corporate Income Tax.

In fact, the integration of autonomous taxation in the Corporate Income Tax Code (and the Personal Income Tax Code) conferred a dualistic nature, in certain aspects, to the regulatory system of this tax, which was manifested, in particular, in the context of subparagraph a) of paragraph 1 of Article 90 of the CIRC, in separate determinations of the respective assessments, because they are subject to different rules.

And that is because, in one case, it is the application of the rate(s) of Article 87 of the CIRC to the taxable income determined according to the rules contained in Chapter III of the Code, and in another case, it is the application of the rates to the values of taxable income relating to the different realities contemplated in Article 88 of the CIRC.

There is not a single assessment of Corporate Income Tax but rather two separate determinations.

There are, therefore, two distinct calculations which, although processed, pursuant to subparagraph a) of paragraph 1 of Article 90 of the CIRC, in the declarations referred to in Articles 120 and 122 of the same code, are made on the basis of different parameters, since each is materialized in the application of its own rates, provided for in Articles 87 or 88 of the CIRC, to the respective taxable income determined equally in accordance with its own rules.

Whenever incompatibility is detected between the objectives inherent in the general structure of Corporate Income Tax and the objectives governing autonomous taxation, in principle, the general rules that comprise the discipline of this tax do not apply to it.

It results as evident that the integration of autonomous taxation in the Corporate Income Tax Code (and the Personal Income Tax Code) conferred a dualistic nature, in certain aspects, to the regulatory system of this tax, which was manifested, in particular, in the context of subparagraph a) of paragraph 1 of Article 90 of the CIRC, in separate determinations of the respective assessments, because they are subject to different rules, since, in one case, it is the application of the rate(s) of Article 87 of the CIRC to the taxable income determined according to the rules contained in Chapter III of the Code, i.e., based on profit, and in another case, it is the application of the rates to the values of taxable income relating to the different realities contemplated in Article 88 of the CIRC.

The assessment of autonomous taxation is made on the basis of Articles 89 and 90, paragraph 1 of the Corporate Income Tax Code but, applying different rules for the calculation of the tax: (1) in one case the assessment operates through the application of the rates of Article 87 to the taxable income determined in accordance with the rules of Chapter III of the Code, and (2) in the other case, various assessments are determined according to the diversity of facts that give rise to autonomous taxation.

The amount determined pursuant to subparagraph a) of paragraph 1 of Article 90 does not have a unitary character, since it comprises values calculated according to different rules, to which are associated also differentiated purposes, whereby the deductions provided for in the subparagraphs of paragraph 2 can only be made to the part of the Corporate Income Tax assessment with which there is a direct correspondence, so as to maintain the coherence of the conceptual structure of the general regime of the tax.

In fact, it should be noted that the common feature of all the realities reflected in the deductions referred to in paragraph 2 of Article 90 of the CIRC lies in the fact that they relate to income or expenses incorporated in the taxable income determined on the basis of the taxpayer's profit or advance payments of the tax, being therefore entirely unrelated to the realities that comprise the taxable events of autonomous taxation.

The legal nature of the special payment on account, revealed by its configuration as "an instrument or guarantee of payment of the tax for which it is required, and not as a tax in itself," as well as by the function associated with it in combating tax evasion and fraud, links indissolubly this payment to the amount of Corporate Income Tax determined on the taxable income determined on the basis of profit (Chapter III of the Code).

By mere obligation to represent, even if the request could be configured as well-founded regarding the payment of interest, which it is not—since if the principal request is not well-founded, the request for interest will necessarily also not be well-founded—in the situation in question in the proceedings, its calculation would always have as its starting point the date on which the decision dismissing the request for official review was notified.

It must always be noted, definitively resolving the controversial issue, the content of Article 133, which added paragraph 21 to Article 88 of the CIRC, with the effects provided for in Article 135, both contained in the State Budget Law for 2016, published on 30.03.2016, coming into force on the following day, in which it is stipulated, with interpretive character, that "The assessment of autonomous taxation in Corporate Income Tax is made in accordance with the terms provided in Article 89 and is based on the values and rates that result from the provisions of the preceding paragraphs, with no deductions being made to the total amount determined."

II. PRELIMINARY ISSUES

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

The parties have legal personality and capacity.

The parties are legitimate and are legally represented, pursuant to Articles 4 and 10 of the RJAT and Article 1 of Ordinance No. 112-A/2011 of 22 March.

The proceedings are proper.

There are no other preliminary issues to be considered nor defects that would invalidate the proceedings.

It is necessary now to examine the merits of the request.

III. MATTER TO BE DECIDED

The essential issue to be examined is as follows:

Does the Claimant have, or not, the right to proceed with the deduction, also to the Corporate Income Tax assessment produced by the application of autonomous taxation rates, of special payments on account (PEC)?

IV. MATTER OF FACT

IV.1. Facts Established

Before proceeding to the examination of the issues, it is necessary to present the factual matters relevant to their understanding and decision, which, having examined the documentary evidence, the tax administrative proceedings attached, and having regard to the facts alleged, is fixed as follows:

On 21 May 2014, the now claimant proceeded with the presentation of the Corporate Income Tax Form 22 declaration for the fiscal year 2013, having at that moment proceeded with the self-assessment of autonomous taxation for the same fiscal year 2013, in the amount of €55,253.46.

On 12 March 2015, the claimant presented an administrative complaint against the aforementioned self-assessment relating to the fiscal year 2013.

The AT dismissed the administrative complaint and notified the taxpayer of the dismissal on 25.09.2015.

In the fiscal year 2013, the claimant paid €17,865.00 by way of special payment on account.

The Respondent did not permit the taxpayer to deduct the amount of special payment on account from the amount of autonomous taxation determined.

IV.2. Facts Not Established

There are no essential facts not established, since all facts relevant to the examination of the request were considered established.

IV.3. Reasoning on the Matter of Fact

The facts established comprise uncontested matters and matters demonstrated by documents in the proceedings.

The facts contained in paragraphs 1 to 5 are taken as established by the examination of the administrative proceedings, by the documents submitted by the Claimant (documents 1 to 10 of the request for constitution of the Tribunal) and by the position assumed by the parties.

V. THE LAW

The undersigned previously participated in this arbitration center as a member of a panel in proceedings no. 535/2015-T, which examined this legal issue. Having no reason to alter my legal interpretation in advance, I state that I find inadmissible the deduction of the Special Payment on Account (PEC) from autonomous taxation for the reasons which I shall set out below and which are contained in the award delivered in the aforementioned proceedings.

"Preliminary Notes

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

Unlike what occurs with the philosophy underlying the remaining provisions of the Corporate Income Tax Code, income is not taxed but rather expenses or costs.

With autonomous taxation, it is intended in some way to penalize taxpayers for the incurrence of certain types of expenses or costs, under certain conditions, even if such taxpayers have incurred a fiscal loss and, therefore, in that fiscal year did not pay Corporate Income Tax.

The application of autonomous taxation is not limited to corporations and other taxpayers subject to Corporate Income Tax with a profit-making purpose, such taxation also being extended to associations, foundations, non-profit private institutions and other entities that do not exercise, as their principal activity, commercial, industrial or agricultural activities, and also to all entities that have income exempt from or not subject to Corporate Income Tax.

Regarding autonomous taxation, it should be noted that it is determined autonomously and distinctly from the determination made pursuant to Article 90 of the CIRC (version in force in 2013[1]).

Developing further the issue of the nature of autonomous taxation and its degree of connection with Corporate Income Tax, one must go back to the year 1990 to find the first legislative intervention in order to subject certain expenses to autonomous taxation, which occurred with the publication of Decree-Law No. 192/90 of 9 June, whose Article 4 provided that "confidential or undocumented expenses incurred in the course of commercial, industrial or agricultural activities by taxpayers subject to Personal Income Tax who possess or should possess organized accounting or by taxpayers subject to Corporate Income Tax not included in Articles 8 and 9 of the respective Code are taxed autonomously in Personal Income Tax or Corporate Income Tax, as applicable, at a rate of 10%, without prejudice to the provisions of subparagraph h) of paragraph 1 of Article 41 of the CIRC." This provision was subject to various subsequent amendments which successively increased the tax rate provided for therein.

With this type of taxation, on the one hand, it was intended to encourage taxpayers subject to it to reduce as much as possible the expenses that negatively affect tax revenue, and on the other hand, to prevent, through these expenses, companies from proceeding with the disguised distribution of profits, especially dividends, which would thus be subject only to Corporate Income Tax as profits of the company, as well as to combat tax fraud and evasion caused by such expenses not only in relation to Personal Income Tax or Corporate Income Tax, but also in relation to the corresponding contributions, both of employers and employees, to social security.

Saldanha Sanches (Cf. Manual of Tax Law, 3rd Edition, Coimbra Editora, 2007, page 407), with regard to autonomous taxation provided for in Article 81, paragraph 3, of the CIRC (version of 2005, corresponding, in essence, to Article 88, paragraphs 3, 4 and 7, in the 2013 version), wrote the following: "In this type of taxation, the legislator seeks to respond to the admittedly difficult question of the tax treatment of expenses that are found in the area of intersection of the personal sphere and the business sphere, in order to avoid remuneration in kind more attractive for exclusively fiscal reasons or the hidden distribution of profits. The provision presents a characteristic similar to what we will find in the sanction against undocumented costs, with an increase in the rate when the taxpayer's situation does not correspond to a situation of tax normality. If there is no profit in the taxpayer's declaration, the cost may be subject to a negative valuation: for example, we have a rate of 15% applied when the taxpayer had losses in the last two fiscal years and a light passenger vehicle was purchased for more than €40,000 (Article 81, paragraph 4). With this provision, the system shows its dual nature, with an increased autonomous taxation rate for certain special situations that are sought to be discouraged, such as the purchase of vehicles for business purposes or vehicles in principle too expensive when there are losses. This creates a kind of presumption that these costs do not have a business purpose and, for that reason, are subject to autonomous taxation. In summary, the cost is deductible, but autonomous taxation reduces its tax advantage, since here the tax base is not a net income, but rather a cost transformed—exceptionally—into an object of taxation." (emphasis in the original).

Contrary to what occurs in the taxation of income under Personal Income Tax and Corporate Income Tax, in which the set of income earned in a given year is taxed (which implies that only at the end of that year can the tax rate be determined, as well as the bracket in which the taxpayer falls), in the case of autonomous taxation, each expense incurred is taxed, considered in itself, and subject to a certain rate, autonomous taxation being determined independently of the Corporate Income Tax owed in each fiscal year, because it is not directly related to the obtaining of a positive result, and therefore subject to taxation.

Thus, in the case of Corporate Income Tax, we are faced with an annual tax, in which each income received is not taxed individually, but rather the aggregate of all income obtained in a given year, the law considering that the taxable event occurs on the last day of the taxation period (Cf. Article 8, paragraph 9, of the CIRC).

Whereas regarding autonomous taxation in Corporate Income Tax, the taxable event is the very occurrence of the expense, not being faced with a complex fact, of successive formation over a year, but rather with an instantaneous tax fact.

This characteristic of autonomous taxation directs us, thus, to the distinction between periodic taxes (whose taxable event occurs in a successive manner, through the passage of a given period of time, as a rule annual, and tends to repeat itself over time, generating for the taxpayer the obligation to pay tax with a regular character) and single-obligation taxes (whose taxable event occurs in an instantaneous manner, appears isolated in time, generating upon the taxpayer an obligation of payment with an occasional character).

In autonomous taxation, the tax fact that gives rise to the tax is instantaneous: it is exhausted in the act of occurrence of a certain expense that is subject to taxation (although the determination of the amount of tax, resulting from the application of the various autonomous taxation rates to the various acts of occurrence of expenses considered, will take place at the end of a given taxation period). But the fact that the assessment of the tax is made at the end of a given period does not transform it into a periodic tax, of successive formation or of a lasting character. This operation of assessment translates merely into the aggregation, for purposes of collection, of the set of operations subject to that autonomous taxation, whose rate is applied to each expense, with no influence of the volume of expenses incurred in the determination of the rate.

In this case we are faced with a single-obligation tax, applying to operations that occur and are exhausted in an instantaneous manner, in which the tax fact arises isolated in time, originating, for the taxpayer, an obligation of payment with an occasional character. That is, the rates of autonomous taxation in question here do not refer to a period of time, but to a moment: that of the isolated operation subject to the rate, without prejudice to the determination of the amount owed by economic agents subject to the aforementioned "rate" being made periodically, at a given moment, together with other similar operations, without the joint assessment influencing its result.

For this reason, Sérgio Vasques (Cf. Manual of Tax Law, Almedina, 2011, page 293, note 470) draws attention to the fact that taxes on income include single-obligation elements, such as Personal Income Tax liberatory rates or Corporate Income Tax autonomous taxation rates.

Autonomous taxation, in accordance with its initial regulation, constituted as it were a surrogate of the regime of non-deductibility previously provided for in the CIRC.

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

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

Arbitral jurisprudence has decided that autonomous taxation belongs, as a rule, systematically, to Corporate Income Tax, and not to Value-Added Tax, Personal Income Tax, or any other tax in the Portuguese tax system. Such is the case, among others, of the arbitral proceedings delivered within the framework of CAAD, nos. 166/2014-T, 246/2013-T, 260/2013-T, 282/2013-T, 6/2014-T and 36/2014-T, 697/2014-T.

The superior courts have also understood that "autonomous taxation, although formally inserted in the Corporate Income Tax Code, has always had its own treatment, since it does not apply to income, whose formation is occurring throughout the year, but rather to certain occasional expenses that represent autonomous tax facts subject to rates different from those of Corporate Income Tax"(…) "Although it is a form of taxation provided for in the CIRC, it has nothing to do with the taxation of income, but rather with the taxation of certain expenses, which the legislator understood, for the reasons pointed out above, to do in an autonomous manner." (Award of the Superior Administrative Court of 21/03/2012, case 830/11 and, in the same sense, Award of the Superior Administrative Court of 06/07/2011, case no. 0281/11, Award of the Superior Administrative Court of 17.04.2013, case no. 166/13, Award of the Superior Administrative Court of 21.01.2015, case no. 04710/14 and Award of the Administrative Court of Appeal of 16.10.2014, case no. 06754/13).

The Constitutional Court in Award no. 617/2012 of 31/01/2013 held that in autonomous taxation, the tax fact that gives rise to the tax is instantaneous, since "it is exhausted in the act of occurrence of a certain expense that is subject to taxation (although the determination of the amount of tax, resulting from the application of the various autonomous taxation rates to the various acts of occurrence of expenses considered, will take place at the end of a given taxation period). But the fact that the assessment of the tax is made at the end of a given period does not transform it into a periodic tax, of successive formation or of a lasting character. This operation of assessment translates merely into the aggregation, for purposes of collection, of the set of operations subject to that autonomous taxation, whose rate is applied to each expense, with no influence of the volume of expenses incurred in the determination of the rate."

And in Award no. 310/12 of 20 June, the Constitutional Court considered that "(…) unlike what occurs in the taxation of income under Personal Income Tax and Corporate Income Tax, in which the set of income earned in a given year is taxed (which implies that only at the end of that year can the tax rate be determined, as well as the bracket in which the taxpayer falls), in the case, each expense incurred is taxed, considered in itself, and subject to a certain rate, autonomous taxation being determined independently of the Corporate Income Tax owed in each fiscal year, because it is not directly related to the obtaining of a positive result, and therefore subject to taxation."

The generality of legal doctrine does not depart from the understanding of the superior courts. Thus, as taught by Prof. RUI MORAIS, "the issue at hand is a taxation that applies to certain expenses of taxpayers, which are considered as constituting tax facts. It is difficult to discern the nature of this form of taxation and, even more so, the reason why it appears provided for in the codes of taxes on income." (RUI DUARTE MORAIS, Notes on Corporate Income Tax, Almedina, 2009, pp. 202-203). And CASALTA NABAIS also considers that it is "a taxation on expense and not on income" (CASALTA NABAIS, Tax Law, 6th Ed., p. 614). Along the same lines, Professor Ana Paula Dourado asserts that "it is consensual that autonomous taxation hits the taxpayer's expense and not its income." Tax Law, 2015, Almedina, page 237.

It does not appear, therefore, questionable that the mechanism of autonomous taxation of the set of realities provided for in Article 88 of the CIRC aims, primarily, to safeguard the general equilibrium of the tax system itself, the specific equilibria of Corporate Income Tax and the revenue of the tax itself. That is, to aim at preventing that through the significant recognition of expenses such as those provided for in Article 88, distortions affecting the system and the expectation as to what should be the "normal" revenue of the tax are not introduced. In the case, as is equally well known, what is at issue is to discourage the occurrence/recognition of these expenses, first and foremost because, by their nature and purposes, they can more easily be subject to diversion to consumption that is, in essence, private or corresponds to expenses that continue to have, also, as a specific and ultimate purpose, the avoidance of tax. These are realities that, as has been noted previously, present some degree of culpability since, while not directly violating the law, they generate sensible and important imbalances on the general idea of justice, on the fundamental duty to contribute in proportion to one's means, of equality, of sacrifice, of the proportionality of the tax burden in face of the possible manifestations of wealth, of the taxation of real income and of justice.

Functioning in a manner different from what constitutes the essential purpose of Corporate Income Tax—which taxes income—autonomous taxation, it is reaffirmed, taxes certain specific expenses or charges—and constitute an instrumental reality, accessory to that tax, in the exact measure that it is in function of it that they were instituted and are, for this reason, capable of being recognized as having an instrumentality or accessoriness of purposes, rooted in the safeguarding of the purposes of the very tax in which they manifest themselves.

It is thus certain that autonomous taxation does not constitute Corporate Income Tax in the strict sense but is intertwined with it, and should be contained in the "other taxes" which the final part of subparagraph a) of paragraph 1 of Article 45 of the CIRC informs us about (version in force in 2013).

Revelations of this functional connection, and in the context of the legislator's overall intention, stand out, for example, from the discipline of Article 12 of the CIRC regarding entities subject to the transparent taxation regime, in not taxing them in Corporate Income Tax, "except as regards autonomous taxation," a relationship that also manifests itself in the face of paragraph 14 of Article 88 of the CIRC, in the sense that the rates of autonomous taxation take into account the fact that the taxpayer presents or does not present a fiscal loss.

Examined further from another perspective, autonomous taxation must be considered in the context of specific anti-abuse rules and its similarity with the regime provided under paragraph 1 of Article 65 of the CIRC, ("are not deductible for purposes of taxable profit amounts paid or due, on any account, to individuals or legal entities resident outside the Portuguese territory and there subject to a clearly more favorable tax regime, unless the taxpayer can prove that such expenses correspond to operations actually performed and do not have an abnormal character or an excessive amount"). Since autonomous taxation aims at reducing the tax advantage achieved by the deduction to taxable profit of the costs on which it applies and also combat tax evasion which this type of expenses, by its nature, fosters, it cannot itself, through its deduction to taxable profit as an expense of the fiscal year, constitute a factor reducing that reduction of advantage sought and determined by the legislator.

In conclusion, autonomous taxation, which applies to expenses deductible in Corporate Income Tax, form part of the regime and are owed by virtue of this tax, the expenses incurred in the payment of such taxation not constituting deductible expenses for purposes of determining taxable profit.

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

Article 23-A - Expenses non-deductible for tax purposes

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

a) Corporate Income Tax, including autonomous taxation, and any other taxes that directly or indirectly apply to profits."

Without doubt as to the interpretive character of the aforementioned provision, in accordance with the rules of legal hermeneutics, in practice, such norm comes to express what the legislator has always understood and continues to understand, that is, that expenses incurred with the cost associated with autonomous taxation do not matter for purposes of determining taxable profit."

Additionally, recently, Law No. 7-A/2016 of 30.03 brought a new version to Article 88, paragraph 21 of the CIRC:

"21 - The assessment of autonomous taxation in Corporate Income Tax is made in accordance with the terms provided in Article 89 and is based on the values and rates that result from the provisions of the preceding paragraphs, with no deductions being made to the total amount determined."

In accordance with Article 88, paragraph 21 of the CIRC, it is evident that no deductions are made to autonomous taxation.

In Article 135 of the same legal instrument, the legislator decided to give interpretive character to the aforementioned rule. As Professors Pires de Lima and Antunes Varela state, interpretive law should be considered that which intervenes to decide a question of law whose solution is controversial or uncertain, enshrining an understanding which jurisprudence by its own means could have reached. Cf. Annotated Civil Code, Vol. I, Coimbra Editora, 1987, page 62.

The interpretive law is integrated into the interpreted law, and its effects retroact to the entry into force of the old law, as if it had been published on the date on which the interpreted law was published, saving the effects already produced by the performance of the obligation, by a final judgment, by settlement even if not approved, or by acts of an analogous nature (Article 13, paragraph 1 of the Civil Code). In accordance with paragraph 1 of Article 13 of the Civil Code, the interpretive law is considered integrated into the interpreted law. Thus, citing Professors Pires de Lima and Antunes Varela: "This means that its effects retroact to the entry into force of the old law, everything occurring as if it had been published on the date on which the interpreted law was published." In CC Annotated, Vol. I, Coimbra Editora, 1987, page 62

As stated by Professor Baptista Machado "(…) the reason why the interpretive law applies to facts and situations prior thereto is fundamentally based on the fact that it, by coming to consecrate and establish one of the possible interpretations of the OL [old law] with which the interested parties could and should have relied, is not susceptible to violating safe and legitimately founded expectations." In Introduction to Law and to Legitimizing Discourse, Almedina, 1996, page 246. Professor Baptista Machado further states: "For a new law to be truly interpretive, two requirements are therefore necessary: that the solution of prior law be controversial or at least uncertain; and that the solution defined by the new law be within the framework of the controversy and be such that the judge or interpreter could reach it without exceeding the limits normally imposed on the interpretation and application of the law. If the judge or interpreter, in the face of old texts, could not feel authorized to adopt the solution that the new law comes to establish, then the latter is decidedly innovative." In Introduction to Law and to Legitimizing Discourse, Almedina, 1996, page 24

In the case at hand, the solution resulting from a restrictive interpretation of Articles 88 and 93 of the CIRC was controversial as revealed by the decision of CAAD delivered in case no. 113/2015-T. Furthermore, the solution sought by the legislator met the only judicial decision known at the date in question that analyzed the deductibility, or not, of the special payment on account from the amount of autonomous taxation.

The interpretive law is distinguished from innovative law by aiming to resolve a doubtful or controversial question in the interpreted law and by resolving it in a sense that would be possible for any interpreter. Since it is a controversial matter and Law No. 7-A/2016 of 30.03 has adopted the interpretation followed by the only judicial decision delivered, it appears that the interpretive law is not innovative.

Moreover, "(…) there is no, as regards the deductibility of special payments on account, concern for the protection of confidence, since special payments are connected with the volume of turnover, not depending on any specific behavior that the taxpayer would be led to adopt by being given the expectation of obtaining, as a counterpart, a tax advantage." Case No. 673/2015-T of CAAD, 28.04.2016

The non-deductibility of special payments on account cannot constitute any violation of any eventual expectation of the taxpayer because its value does not depend on a specific behavior of the taxpayer, which could have conditioned it, but rather on the volume of turnover. Furthermore, even if such expectations existed, they would not be legitimate because the deduction of special payments on account from the amount of autonomous taxation had never been admitted before.

The claimant further advocates, in submissions, that the eventual application of the interpretive law constitutes a violation of the prohibition on retroactive application of tax laws (Article 103, paragraph 3 of the Constitution).

The provision of Article 103, paragraph 3 of the Constitution does not prevent the legislator from approving interpretive norms, provided that they are truly interpretive. The rule to apply is the interpreted rule and not the interpretive rule. (In this sense, Cf. Diogo Leite Campos, Mônica Leite de Campos, Tax Law, 2nd Ed., Almedina, page 220 and António Lima Guerreiro, Annotated General Tax Law, Editora Rei dos Livros, 2001, page 90). This argument cannot fail to be without merit since the law is interpretive, not innovative.

Thus, the application of a new law to facts already consumed is not at issue. In this sense, Cf. case of CAAD no. 673/2015-T, 28.04.2016.

Citing Professor Ferrer Correia (Opinion published in the Compilation of Jurisprudence, year XIV, volume IV, cited in the Award of the Superior Administrative Court of 4 February 1998, case no. 21731, in Appendix to the Official Gazette, 8 November 2001.) "In the absence of other elements that would make it possible to give interpretive value to a rule, the fundamental criterion to be used for this purpose is 'that the principle contained in the new law can be considered inherent in the prior law. Now, this requirement should be considered satisfied whenever it can be said that courts would normally, in the realm of prior legislation, have decided in accordance with such principle'."

As already mentioned, the interpretive rule was in line with the only judicial decision delivered prior to its publication (Case No. 113/2015-T).

The mere interpretation carried out by the interpretive rule already resulted from the interpretation, based among other elements on the rational element and on the purpose sought by the rule, given its nature and purpose.

Accordingly, I conclude that the interpretive character of Article 88, paragraph 21, imposed by Article 135 of Law No. 7-A/2016 of 30.03, is not contrary to the provision contained in Article 103, paragraph 3 of the Constitution.

The Special Payment on Account (PEC)

This regime is provided for in Articles 106 of the CIRC and 33 of the General Tax Law.

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

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

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

The special payment on account is also used as a "fiscal anesthesia mechanism," reducing the period of time between the tax fact and the payment of the tax. Although the autonomous taxation regime has as its foundation the taxation of presumed income, it differs from the regime of the special payment on account, in that the payment of autonomous taxation is definitive and is not subject to subsequent adjustments.

The special payment on account regime presents many other specificities that it would now be inappropriate to mention; only the possibility of the amount paid being able to be deducted from the assessment, making it much less burdensome for companies than autonomous taxation, is highlighted.

Furthermore, companies may, in certain circumstances, obtain reimbursement of the special payment on account paid, if they are unable to deduct the entire amount, thus functioning as a way to deflect the presumption of income that results from this institute.

The application of the special payment on account is based on the volume of turnover relating to the previous taxation period, pursuant to the cited Article 106, paragraph 2, of the CIRC, and the payments are made during the period of formation of the tax fact. (In this sense, Cf. António Lima Guerreiro, Annotated General Tax Law, Editora Rei dos Livros, page 167).

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

Since the creation of the special payment on account, problems of constitutionality have been raised, as it departs, in particular, from the principle of tax capacity. The fact is that, despite the heated debate, the institute of the special payment on account persists.

From the foregoing it is evident that the payment of the special payment on account in 2013 is not deductible from the amount of autonomous taxation determined in the declaration presented by the Claimant for the same period."

In conclusion, following the decisions previously delivered at CAAD (case no. 113/2015-T and case no. 673/2015-T), I decide against the deduction of the special payment on account from the amount of autonomous taxation as it is contrary to the provisions of Articles 88, 93, 106 of the CIRC and 33 of the General Tax Law.

As for the request made subsidiarily, having regard to the foregoing, it should also fail because the legal basis of autonomous taxation results from the provision of Article 88 of the CIRC, with no deduction being admitted.

Indemnity Interest

The examination of the condemnation of the Respondent in the payment of indemnity interest is prejudiced by the solution reached above.

Maintaining the tax act challenged, in consequence, the request for indemnity interest should also be judged without merit.

III. DECISION

In view of all of the foregoing, it is decided:

a) To judge the request for declaration of illegality of the act of dismissal of the administrative complaint no. …/15 and the consequent self-assessment of Corporate Income Tax no. 2014…, for the fiscal year 2013, in its entirety without merit;

b) To maintain entirely the tax act subject to this proceedings;

c) To condemn the Claimant in the payment of the costs of the proceedings, as follows.

The value of the proceedings is fixed at €17,865.00 pursuant to Article 97-A, paragraph 1, a), of the Administrative Tax Procedure Code, applicable by virtue of subparagraph a) of paragraph 1 of Article 29 of the RJAT and paragraph 2 of Article 3 of the Regulations on Costs in Tax Arbitration Proceedings.

The arbitration fee is fixed at €1,224.00, pursuant to Table I of the Regulations on Costs in Tax Arbitration Proceedings, to be paid entirely by the Claimant, since the request was in its entirety without merit, pursuant to Articles 12, paragraph 2, and 22, paragraph 4, both of the RJAT, and Article 4, paragraph 4, of the aforementioned Regulations.

Let notice be given.

Lisbon, 20 June 2016

The Arbitral Tribunal

(André Festas da Silva)

[1] References in this text to the CIRC, when no other specificities are omitted, shall refer to the CIRC in force during the period in question in the proceedings (2013).

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

Frequently Asked Questions

Automatically Created

Can special advance payments (PEC) be deducted against autonomous taxation (tributações autónomas) under the Portuguese IRC Code?
Under Portuguese IRC law, the deductibility of special advance payments (PEC) from autonomous taxation is disputed. Article 90(2)(c) of the IRC Code establishes that PEC constitutes a deduction from IRC assessment, listed third in the mandatory deduction hierarchy after double taxation credits and tax benefits. The central legal question is whether autonomous taxation qualifies as part of the IRC assessment for Article 90 purposes. Taxpayers argue that since autonomous taxation is IRC under Article 45(1)(a) and forms an integral part of the IRC regime, any unused PEC amounts should be deductible from autonomous taxation liability. The Tax Authority contends that Article 90 does not expressly authorize such deduction and that autonomous taxation serves distinct anti-abuse purposes separate from the general IRC assessment base.
What is the legal basis for PEC deduction under Article 90 of the IRC Code in Portugal?
Article 90 of the Portuguese IRC Code establishes the legal framework for IRC assessment and deductions. Article 90(1)(a) provides that when IRC assessment is made by the taxpayer in the periodic declaration, it is based on the taxable income declared. Article 90(2) then mandates specific deductions in strict order: (a) credits for international double taxation; (b) tax benefits; (c) special payments on account (PEC); and (d) withholding taxes not subject to compensation or reimbursement. The PEC represents advance payments of IRC made by taxpayers. The legal dispute centers on whether 'IRC assessment' in Article 90 encompasses only the standard tax calculation or also includes autonomous taxation. Taxpayers argue that without considering autonomous taxation as part of IRC assessment under Article 90, there would be no provision in the IRC Code defining how autonomous taxation is assessed, creating a legislative gap.
How does CAAD arbitration process work for disputes over IRC self-assessment and PEC deductibility?
The CAAD (Centro de Arbitragem Administrativa) arbitration process for IRC disputes follows Decree-Law No. 10/2011 of January 20. The process begins with the taxpayer's request for arbitration tribunal constitution under Articles 2 and 10, designating either a sole arbitrator or requesting appointment by the CAAD Deontological Council. The CAAD President accepts the request and notifies the Tax Authority (AT), which must present a response. An arbitrator is designated under Article 5(2)(b) and Article 6(1) of RJAT. The tribunal may dispense with oral hearings under Article 18 RJAT, proceeding instead with written submissions. Both parties present sequential written submissions - the claimant first, followed by the respondent. The arbitration addresses self-assessment disputes, including PEC deductibility issues, with decisions having binding effect on the tax liability determination.
What are the consequences of a successful claim for PEC deduction against autonomous taxation, including refund and compensatory interest?
A successful claim for PEC deduction against autonomous taxation results in several legal consequences under Portuguese tax law. First, the arbitral tribunal would declare the illegality of the Tax Authority's dismissal of the administrative complaint and the partial illegality of the IRC self-assessment for the relevant fiscal year. Second, the taxpayer receives a refund of the amount improperly paid - in this case €17,865.00 representing the PEC that should have been deducted from autonomous taxation. Third, pursuant to Articles 43 and 100 of the General Tax Law (Lei Geral Tributária), the taxpayer is entitled to compensatory interest (juros indemnizatórios) calculated on the overpaid amount from the date of payment until refund. This compensatory interest compensates taxpayers for paying tax obligations exceeding the legally due amount. The refund process involves correcting the self-assessment to recognize the PEC deduction, reducing the final IRC liability accordingly.
What is the order of deductions applied to IRC tax liability under Article 90(2) of the Portuguese IRC Code?
Article 90(2) of the Portuguese IRC Code establishes a mandatory sequential order for deductions from IRC tax liability that cannot be altered. The hierarchy is: (a) first, credits for international double taxation elimination; (b) second, tax benefits (benefícios fiscais) granted under applicable legislation; (c) third, special payments on account (PEC - Pagamento Especial por Conta), which are advance IRC payments made by taxpayers; and (d) fourth, withholding taxes that are not subject to compensation or reimbursement under applicable law. This strict ordering ensures proper application of tax credits and prevents improper deduction sequencing. The dispute in this case concerns whether this deduction order applies only to 'normal' IRC assessment or also extends to autonomous taxation. If autonomous taxation is considered part of the overall IRC assessment, taxpayers could deduct unused PEC amounts against autonomous taxation liability after exhausting deductions against standard IRC assessment, potentially reducing total IRC payable.