Process: 79/2014-T

Date: October 2, 2014

Tax Type: IRC

Source: Original CAAD Decision

Summary

Process 79/2014-T addresses a critical IRC (Corporate Income Tax) controversy: whether autonomous taxation charges (tributações autónomas) paid in 2010 are deductible as business expenses for IRC purposes. The claimant, B... S.A., challenged a self-assessment after paying €1,335,971.71 in autonomous taxation on vehicles, travel allowances, representation expenses, bonuses, and undocumented expenses. Initially treating these charges as non-deductible IRC, the company later filed an administrative objection seeking to deduct these amounts, arguing autonomous taxation constitutes a separate levy distinct from IRC itself. The Tax Authority rejected this position, prompting the company to seek arbitration at CAAD under Decree-Law 10/2011. The dispute involves €386,296.22 in allegedly excessive IRC and municipal surcharge. The claimant's core argument relies on the legal nature of autonomous taxation: since even IRC-exempt entities must pay autonomous taxation per article 81(2) CIRC, these charges represent genuine business costs separate from the IRC itself. The company cited precedent case 7/2011-T supporting deductibility. This case exemplifies the complex interplay between different IRC taxation mechanisms and raises fundamental questions about whether a tax imposed within the IRC system can simultaneously qualify as a deductible expense for determining IRC liability. The tribunal composition included Judge José Poças Falcão, Professor Luís Menezes Leitão, and Doctor Henrique Curado, constituted on April 3, 2014.

Full Decision

The arbitrators, Judge José Poças Falcão (arbitrator-president), Professor Doctor Luís Menezes Leitão and Doctor Henrique Curado, (arbitrators-panel members), appointed by the Ethics Council of the Center for Administrative Arbitration ("CAAD") to form the Collective Arbitral Tribunal, constituted on 3 April 2014, hereby agree as follows:

I. REPORT

A..., S.A., with registered office at Avenue ..., …, legal entity number …, registered at the Commercial Registry Office of … under the same number (B… or claimant), falling within the territorial scope of the Tax Authority Office of …, hereby, under the provisions of articles 2, no. 1, paragraph a), and 10, nos. 1 and 2, of Decree-Law no. 10/2011 of 20 January and articles 1 and 2 of Ordinance no. 112-A/2011 of 22 March, requests the constitution of an Arbitral Tribunal, urging it to pronounce itself on the act of rejection of the administrative objection, and, "(…)consequently (and in final or ultimate terms), the act of self-assessment of Corporate Income Tax (IRC) and resulting municipal surtax for the tax year 2010, to the extent corresponding to the non-deductibility of expenses related to autonomous taxation of that same tax year (cfr. Docs. nos. 1 and 2[1]) (…)".

The claimant intends to submit to the appreciation of this Arbitral Tribunal (i) the legality of the rejection of the administrative objection, to the extent that it fails to acknowledge the illegality of that part of the self-assessment of Corporate Income Tax (IRC) and resulting municipal surtax relating to the tax year 2010 of B… and, likewise, (ii) the legality of that part of the self-assessment, whose amount amounts to € 386,296.22.

It alleges, in essence:

It proceeded to the self-assessment of Corporate Income Tax (IRC) and resulting municipal surtax for the tax year 2010 through the submission of Form 22 (Doc. no. 1), and on 26 August 2013 it submitted a modification to such self-assessment through the submission of a substitute declaration (Doc. no. 2);

On 30 August 2013, the claimant filed, with the Large Taxpayers Unit, an administrative objection against the said self-assessment of Corporate Income Tax (IRC) and resulting municipal surtax relating to the tax year 2010 (cfr. copy of the cover page of the administrative objection, attached herein as Doc. no. 3).

On 13 November 2013, the claimant was notified, through Official Letter no. …, of 11 November 2013, of the decision to reject the administrative objection, by order issued on 6 November 2013, by His Excellency the Head of the Division of Tax Management and Assistance of the Large Taxpayers Unit (cfr. copy of the decision rejecting the administrative objection, attached herein as Doc. no. 4).

On 30 August 2013, the claimant filed, with the Large Taxpayers Unit, an administrative objection against the said self-assessment of Corporate Income Tax (IRC) and resulting municipal surtax relating to the tax year 2010 (cfr. copy of the cover page of the administrative objection, attached herein as Doc. no. 3).

On 13 November 2013, the claimant was notified, through Official Letter no. …, of 11 November 2013, of the decision to reject the administrative objection, by order issued on 6 November 2013, by His Excellency the Head of the Division of Tax Management and Assistance of the Large Taxpayers Unit (cfr. copy of the decision rejecting the administrative objection, attached herein as Doc. no. 4).

The claimant now requests that the illegality be declared of both the rejection of the administrative objection and the partial illegality of the aforementioned self-assessment act (cfr. Docs. nos. 1 and 2) – and that it be consequently annulled in that part –, in accordance with article 2, no. 1, paragraph a), of Decree-Law no. 10/2011, more specifically regarding that part of the aforementioned self-assessment act that reflects the non-deductibility of expenses related to autonomous taxation, to which corresponds an amount of tax wrongfully assessed in the amount of € 386,296.22.

In the said self-assessment of Corporate Income Tax (IRC) for the tax year 2010, B… also proceeded to the self-assessment of autonomous taxation envisaged in article 88 of the Corporate Income Tax Code (CIRC), in a total, in final terms, of € 1,335,971.71 – cfr. field 365, of table 10, of Docs. nos. 1 and 2 – which correspond to (cfr. table 11 of Docs. nos. 1 and 2, and Doc. no. 5 attached herein):

i) autonomous taxation on vehicle expenses, which generated the amount of € 604,848.17;

ii) autonomous taxation on travel allowances which generated the amount of € 6,462.16;

iii) autonomous taxation on representation expenses, which generated the amount of € 96,500.05;

iv) autonomous taxation on bonuses, which generated the amount of € 618,755.18;

v) autonomous taxation on confidential or undocumented expenses, which generated the amount of € 9,406.15.

Autonomous taxation of the tax year 2010 which, similarly to the Corporate Income Tax (IRC) also self-assessed, have been fully paid (cfr. field 368 of table 10 of Docs. nos. 1 and 2).

However, B… did not deduct, for purposes of determining the taxable profit for that tax year 2010, the expense incurred with the said autonomous taxation, instead treating it as if it were Corporate Income Tax (IRC) or municipal surtax (Doc. no. 6).

And it should have deducted or, from another perspective, it has legally the right to recognize the expenses related to autonomous taxation in the computation of taxable profit for purposes of Corporate Income Tax (IRC) (and the resulting municipal surtax), hence the present request for constitution of an Arbitral Tribunal which has as its object the self-assessment of Corporate Income Tax (IRC) (and resulting municipal surtax) relating to the tax year 2010.

In terms of quantification of the tax at issue here (tax impact arising from the failure to deduct the expense related to autonomous taxation in the computation of Corporate Income Tax (IRC), including the state surtax, and the resulting Municipal Surtax), we have the following values:

a) To the establishment in … is attributable a ratio of total profits of 0.01 (1%) (cfr. table 3, field 5, of Annex C of Form 22 contained in Doc. no. 2), whereby the reduction of such total profits as a result of the deduction of expenses related to autonomous taxation in the amount of € 1,335,971.71, results in a reduction of the Corporate Income Tax (IRC) assessed at the rate of … in the amount of € 2,337.95 [(€ 1,335,971.71 x 0.01 = € 13,359.72) x 17.5%]

b) The remaining reduction of taxable profit (€1,335,971.71 - 13,359.72 = € 1,322,611.99) is subject to the standard rate of Corporate Income Tax (IRC) (of 25%) which generates a reduction of such tax in € 330,653 (€ 1,322,611.99 x 25%);

c) The Corporate Income Tax (IRC) resulting from the application of the surtax known as state surtax, is reduced in turn in the amount of € 33,399.29 (€ 1,335,971.71 x 2.5%);

d) And the resulting municipal surtax is reduced in the amount of € 19,905.98 (€ 1,335,971.71 x 1.49% - cfr. the municipal surtax rate in Docs. nos. 1 and 2);

e) Whereby the Corporate Income Tax (IRC) and municipal surtax will be reduced in a total of € 386,296.22.

After exhaustive argumentation and references to Doctrine and Case Law, the claimant concludes, very briefly, that, "(…)given its raison d'être, even entities exempt from Corporate Income Tax (IRC) are, as already stated, subject to autonomous taxation (art. 81, no. 2, of the CIRC, wording on the date of the tax events), from which it is drawn, once again, that such taxation has nothing to do with taxation in Corporate Income Tax (IRC)(…)"

Referring to the arbitral case law on the matter, it cites and transcribes the award rendered in case no. 7/2011-T, [pp 17 et seq – published on the CAAD website and in which the arbitrators were Counsellor Judge Brandão de Pinho, Professor Manuel Pires and Professor Ana Paula Dourado (cfr. Doc. no. 8)] – which also upholds the understanding practically unanimous with respect to the differentiation between the Corporate Income Tax (IRC) (which taxes income) and autonomous taxation (which does not tax income, but rather affects expenses or charges): "(…)We may consider it settled that autonomous taxation affects the expense of the taxpayer (contributor) and not its income. In doing so, the legislator is waiving the rule of taxation of accretion income and net income – if the non-deductibility of undocumented expenses is inherent to the taxation of net income, autonomous taxation of such expenses does not observe this rule and has purposes different from the taxation of accretion income" (p 30).

"Although it limits the taxation of accretion income and net income, and therefore does not consist of a direct method of taxation (a method that must be the rule, in light of art. 104, no. 2 of the CRP [Portuguese Constitution]), taxation of expense is likewise not constitutive of an indirect method of taxation, since one is not taxing the income of the taxpayer who incurs such undocumented expenses (and others)(…)" (p 32).

The request for constitution of the Arbitral Tribunal was accepted by His Excellency the President of CAAD and immediately notified to the Respondent in accordance with legal requirements.

In accordance with and for purposes of the provision in paragraph a), no. 2 of article 6 of the RJAT [Regulations of Tax Arbitration], by decision of His Excellency the President of the Ethics Council, duly communicated to the parties, within the legally provided timeframes, the signatories were appointed arbitrators, having communicated to the Ethics Council and to the Center for Administrative Arbitration their acceptance of the appointment within the timeframe stipulated in article 4 of the Code of Ethics of the Center for Administrative Arbitration.

The Tribunal was constituted on 3 April 2014, in accordance with the requirement of paragraph c), no. 1 of article 11 of the RJAT.

The Tax Authority (AT) filed a response to the request for arbitral pronouncement, expressing opposition based on the allegation, in essence and in summary:

  • to the same extent that taxes incurred on facts not connected with the obtainment of income subject to Corporate Income Tax (IRC) are not deductible, also with expenses in relation to which the legislator excluded deductibility, it is logically necessary to conclude that taxes incurred thereon, given their derivative character, share in their non-deductibility, under penalty of subverting the practical scope and evaluative import of the provisions from which results the non-deductibility of such expenses;

  • the logical-legal principle of accessorium principale sequitur applies fully here, as a consequence of which, if the principal (the expense) is not deductible, the accessory (the tax) likewise cannot be.

  • something that is especially evident in the case of expenses whose non-deductibility results from non-compliance with tax rules, such as undocumented expenses, in relation to which it is also interesting to compare with the understanding established in the Award of the Plenary of the Tax Litigation Division of the Supreme Administrative Court (STA), of 6.12.2000, in appeal no. 19.003, where, faced with the question of the deductibility of VAT resulting from additional assessment, it was established that "the requirement of necessity is not met (being) in question a failure to comply with tax laws";

  • the question is not whether autonomous taxation on undocumented expenses are also undocumented expenses; what is at issue is the necessity of such expense, not least because it is immanent to a non-deductible outlay;

  • to admit the deductibility of tax expenses derived from non-deductible expenses constitutes an insurmountable systematic contradiction;

  • neither the case law nor the authors cited, in abundance, by the Claimant pronounce themselves to the effect that autonomous taxation is not, at least formally, Corporate Income Tax (IRC), nor do they advocate its deductibility to taxable profit, either by its exclusion from paragraph a) of no. 1 of article 45 of the CIRC, or by its inclusion in paragraph f) of no. 1 of article 23 of the CIRC;

  • the case law of the Constitutional Court cited by the Claimant (e.g. awards no. 310/2012, 382/2012 and 617/2012), deals exclusively with the application of the autonomous taxation rates, from the perspective of the prohibition of retroactivity, confining itself to the question of the rules of application of law in time, but never suggesting that it is any "tax" distinct from the Corporate Income Tax (IRC), merely addressing the distinct tax events on which the respective rates are applied;

  • and the case law of the Supreme Administrative Court on which the Claimant relies in its Request, concerns itself with the question of the retroactive application of the alteration of autonomous taxation rates (awards no. 0281/11 and no. 0757/11) and with the tax transparency regime (it is stated in award no. 0830/11: "It is thus evident that autonomous taxation constitutes fiscal realities completely different from the tax transparency regime both because autonomous taxation does not affect income, but rather the expense as such, and because each expense is deemed to constitute an autonomous tax event"), once again placing the emphasis on the specificity of autonomous taxation in its form of computation in relation to income taxation, without any of the awards "jumping" to the conclusion, as the Claimant wishes, that these are not Corporate Income Tax (IRC) and that it is not permissible to include them in paragraph a) of no. 1 of article 45 of the CIRC;

  • one cannot deny that autonomous taxation is formally inserted in the Corporate Income Tax (IRC) payable by the taxpayer;

  • and such observation is not disputed by the case law nor by the prestigious authors cited by the Claimant, which, it should be emphasized, address the question of the specificities of autonomous taxation precisely on the assumption that they formally comprise the Corporate Income Tax (IRC) payable by taxpayers;

  • following the case law referred to, the "autonomy" that gives name to autonomous taxation rates concerns the facts on which these are applied and the specificities in their computation, but not, legally, in relation to the remaining portions of the Corporate Income Tax (IRC) to be self-assessed and paid by the taxpayer, since in this light autonomous taxation is, nonetheless, Corporate Income Tax (IRC);

  • proof of this is the treatment that the legislator gave it in the alteration introduced by Law no. 2/2014, of 16 January, which added to that paragraph a) of no. 1 of article 45 of the Corporate Income Tax Code, which now appears in paragraph a) of no. 1 of article 23-A: "The Corporate Income Tax (IRC), including autonomous taxation,(…)",

  • there are already four arbitral decisions (187/2013-T and 209/2013-T, 246/2013-T and 260/2013-T) which, dealing with the substantive question under discussion in the present proceedings, refused the requests for tax deductibility of the expenses incurred with autonomous taxation for purposes of determining the taxable profit of legal entities.

In accordance with and on the basis of the order of 28-5-2014, the meeting provided for in article 18 of the RJAT was dispensed with.

II – SANITATION

The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with article 2 of the RJAT.

The parties have legal personality and capacity, are legitimate and are regularly represented, (cf. articles 4 and 10, no. 2 of the RJAT and article 1 of Ordinance no. 112-A/2011 of 22 March.

The proceedings do not suffer from nullities.

III. REASONING

A. MATTER OF FACT

For the appreciation of this issue it is important to take into account the following facts, proven on the basis of the elements contained in the proceedings:

  1. The Claimant proceeded to the self-assessment of Corporate Income Tax (IRC) and resulting municipal surtax for the tax year 2010, as well as to the self-assessment of autonomous taxation envisaged in article 88 of the Corporate Income Tax Code, through the submission of Form 22

  2. …and, on 26 August 2013 it submitted a modification to such self-assessment through the submission of a substitute declaration (Doc. no. 2);

  3. On 30 August 2013, the claimant filed, with the Large Taxpayers Unit, an administrative objection against the said self-assessment of Corporate Income Tax (IRC) and resulting municipal surtax relating to the tax year 2010 (cfr. copy of the cover page of the administrative objection, attached herein as Doc. no. 3).

  4. On 13 November 2013, the claimant was notified, through Official Letter no. …, of 11 November 2013, of the decision to reject the administrative objection, by order issued on 6 November 2013, by His Excellency the Head of the Division of Tax Management and Assistance of the Large Taxpayers Unit (cfr. copy of the decision rejecting the administrative objection - Doc. no. 4 attached to the request).

  5. In the said self-assessment of Corporate Income Tax (IRC) for the tax year 2010, B… also proceeded to the self-assessment of autonomous taxation envisaged in article 88 of the CIRC, in a total, in final terms, of € 1,335,971.71 – cfr. field 365, of table 10, of Docs. nos. 1 and 2 – which correspond to (cfr. table 11 of Docs. nos. 1 and 2, and Doc. no. 5 attached herein):

i) autonomous taxation on vehicle expenses, which generated the amount of € 604,848.17;

ii) autonomous taxation on travel allowances which generated the amount of € 6,462.16;

iii) autonomous taxation on representation expenses, which generated the amount of € 96,500.05;

iv) autonomous taxation on bonuses, which generated the amount of € 618,755.18;

v) autonomous taxation on confidential or undocumented expenses, which generated the amount of € 9,406.15.

  1. Autonomous taxation of the tax year 2010 which, similarly to the Corporate Income Tax (IRC) also self-assessed, have been fully paid (cfr. field 368 of table 10 of Docs. nos. 1 and 2).

  2. In the context of the self-assessment of Corporate Income Tax (IRC) for the tax year 2010, the Claimant computed a total of autonomous taxation, of € 386,296.22;

  3. The Respondent did not deduct, for purposes of determining the taxable profit for the tax year 2010, the expense incurred with the identified autonomous taxation.

B. REASONING

With regard to the matter of fact, the Tribunal need not pronounce itself on everything that was alleged by the parties, it being incumbent upon it the duty to select the facts that matter for the decision and to discriminate the proven matter from the unproven matter (cf. art. 123, no. 2, of the CPPT [Code of Tax Procedure] and article 607, no. 3 of the CPC [Code of Civil Procedure], applicable pursuant to article 29, no. 1, paragraphs a) and e), of the RJAT).

In this manner, the facts relevant to the judgment of the case are chosen and selected based on their legal relevance, which is established in view of the various plausible solutions to the question(s) of Law (cf. article 511, no. 1, of the CPC, applicable pursuant to article 29, no. 1, paragraph e), of the RJAT).

With regard to the proven facts, the conviction of the Arbitral Tribunal was based on the documentary collection attached, including the administrative instructory proceedings.

It was also considered, in the appreciation of the evidence, the circumstance of not noting in the pleadings presented any controversy between the parties regarding the factual framework alleged by the claimant.

No facts with relevance to the appreciation of the merits of the case were found that were not proven.

C. THE LAW

The thema decidendum of the present request for arbitral pronouncement is reduced to (i) autonomous taxation and, as the central question (ii) to the fiscal recognition of the expenses incurred with the same. [2]

Setting forth the object thereof in the question of whether the sums paid within the framework of autonomous taxation [3] by a taxpayer subject to Corporate Income Tax (IRC) should be considered a deductible expense for purposes of determining the taxable profit subject to such tax.

The doubt about the deductibility of autonomous taxation within the scope of the previous wording of the Corporate Income Tax Code arises as a result of the interpretive margin created by the combination of two rules: on the one hand, the general principle of deductibility of expenses demonstrably necessary for the realization of income subject to tax or for the maintenance of the income-producing source, namely those of a fiscal and parafiscal nature, which resulted from article 23, no. 1, paragraph f), of the Corporate Income Tax Code and on the other hand, the rule of non-deductibility envisaged in paragraph a) of no. 1 of article 45 of the same Code, in accordance with which expenses were not deductible for purposes of determining taxable profit the Corporate Income Tax (IRC) and any other taxes that directly or indirectly affect the profits.

Concretely, the doubts arise because the rule envisaged in paragraph a) of no. 1 of article 45 of the Corporate Income Tax Code (with the wording in force in 2010) does not expressly mention autonomous taxation and because the general principle in the context of Corporate Income Tax (IRC) was and is the deductibility of expenses necessary for the realization of income subject to tax or for the maintenance of the income-producing source. Thus, faced with a general principle of deductibility of expenses and the absence of express reference to autonomous taxation, the doubt arises as to whether the legislator intended to include them or not in the exception of non-deductibility envisaged in paragraph a) of no. 1 of article 45.

Such doubts raised regarding the deductibility of autonomous taxation in the context of Corporate Income Tax (IRC) are, therefore, entirely justifiable given the uncertainty created by the literal element of the rules set forth and about the very technical nature of the type of tax that is autonomous taxation, which, this Tribunal acknowledges, does not have the typical characteristics of a tax such as Corporate Income Tax (IRC).

Thus, it will be necessary to deepen the analysis of the normative framework beyond its literal element.

Let us then see:

At the time of the tax events in question (2011) article 45, no. 1, paragraph a) of the CIRC prescribed as follows:

"The following expenses are not deductible for purposes of determining taxable profit:

a) The Corporate Income Tax (IRC) and any other taxes that directly or indirectly affect the profits"

At issue, and as extracted from the Claimant's request (articles 16 and 18), are autonomous taxation, arising from the situations envisaged in nos. 3, 4, 9 and 13 of article 88 of the CIRC, that is, situations in which the issue is not raised regarding their necessity and deductibility in light of the then applicable article 23 of said legislation, that is, we are dealing with autonomous taxation of deductible expenses.

The interpretation to be given to the provision in question will consequently determine the sense of the present arbitral pronouncement.

It appears, thus, as a preliminary task the invocation of the rules on the interpretation of laws and, with particular emphasis on tax rules.

Article 11 of the LGT [General Tax Law] establishes the essential rules for the interpretation of tax laws as follows:

Article 11

Interpretation

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

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

  2. Should doubt persist regarding the meaning of the applicable rules of incidence, the economic substance of the tax facts should be considered.

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

The "general principles of interpretation" to which the transcribed no. 1 refers are established in article 9 of the Civil Code, which reads as follows:

Article 9

Interpretation of the law

"1. Interpretation should not be limited to the letter of the law, but should reconstruct from the texts the legislative thought, taking especially into account the unity of the legal system, the circumstances in which the law was elaborated and the specific conditions of the time in which it is applied.

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

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

It will thus be in light of these rules on the interpretation of laws that the meaning and scope of article 45, no. 1, of the CIRC should be found, not without first undertaking, albeit very briefly, an excursus on the regime of autonomous taxation, insofar as their origin, and evolution are concerned, setting aside (as this is not the object of the present request for pronouncement) the determination of their legal-tax nature.

The origin in the Portuguese tax legal order of such taxation dates back to 1990, with the publication of Decree-Law no. 192/90, of 9 June, where specifically under its article 4, with regard to confidential or undocumented expenses, an autonomous taxation was established at the rate of 10% and, with respect to representation expenses and charges related to light passenger vehicles, a rate of 6.4%.

This rule and, in general, the regime of autonomous taxation, was subsequently subject to various amendments, namely through successive modifications, both of the rates and of the systematization and wording given to them, in the respective codes on taxes on income, that is both in the CIRC and in the CIRS [Code of Personal Income Tax].

With the "Reform of Income Taxation", approved by Law no. 30-G/2000, of 29 December, the decree introducing "autonomous taxation" was repealed, adding to the CIRC article 69 A) – corresponding at the date of the underlying facts (2011) to article 88, where in addition to the maintenance of the incidence of these to undocumented expenses, representation expenses and vehicle expenses, it was extended to other situations of a different nature.

Being able to be taken as established, and for what will be relevant in the sense of the decision to be rendered in the context of the present proceedings, the following assumptions:

(i) autonomous taxation of Corporate Income Tax (IRC) anchored in the various numbers and paragraphs of article 88 of the CIRC, reflect diverse situations, to which different taxation rates also apply;

(ii) autonomous taxation of Corporate Income Tax (IRC) affecting certain expenses of taxpayers subject to Corporate Income Tax (IRC) should be understood as payments independent of the existence or not of taxable matter,

(iii) interpreted as payments, associated with the Corporate Income Tax (IRC), or at least related to it, and which may be understood as an exception with respect to the principle of taxation of legal entities in accordance with computed profit (article 3 of the CIRC),

(iv) ontologically, autonomous taxation does not configure itself as a type of tax distinct from the Corporate Income Tax (IRC),

(v) in autonomous taxation, the tax event that gives rise to taxation is instantaneous: it is exhausted in the act of realization of certain expenses that are subject to taxation (although the computation of the amount of tax resulting from the various taxation rates to the various acts of realization of expenses considered, comes to be effectuated at the end of a given tax period),

(vi) the fact that the assessment of the tax is effectuated at the end of a given tax period does not transform it into a periodic tax, of successive formation or of permanent character. This operation of assessment is translated only in the aggregation, for purposes of collection, of the set of operations subject to such taxation, whose rate is applied to each expense, there being no influence of the volume of expenses incurred in the determination of the rate,

(vii) autonomous taxation is not equivalent to the non-deductibility of the expenses realized by the taxpayer subject to Corporate Income Tax (IRC).

The object of the present arbitral pronouncement is thus recentered, on the question of whether the sums paid within the framework of autonomous taxation by a taxpayer subject to Corporate Income Tax (IRC) (in the proceedings at hand it is a matter of self-assessment of autonomous taxation envisaged under article 88 of the CIRC) should be considered a deductible expense for purposes of determining deductible profit in the operations of determining the taxable profit subject to such tax, returning for such purpose to the interpretation to be given to article 45 of the CIRC.

Task for which, with all due respect, the position defended by the Claimant, which is accompanied by broad and exhaustive citations, both from the Constitutional Court and from the Supreme Administrative Court, is shown to be useless, in that although they were called upon to pronounce themselves on the segment of "autonomous taxation," in none of them was the question regarding its deduction to taxable profit placed.

The same verifying itself as regards the doctrinal contributions on which the Claimant draws, which, in the same way, have come to produce, certainly of undeniable academic and scientific value, various theorizations regarding various topics related to autonomous taxation (question of retroactivity, autonomy as regards the form of computation, rates, comparison with other taxes and others) but which do not, decisively, contribute to the answer to the question inherent in paragraph a) of no. 1 of article 45 of the CIRC.

As has already been stated,[4] "the rule of article 45 of the CIRC, is situated in a context of broad legislative discretion", it being incumbent on the legislator to dictate the situations/circumstances in which certain expenses incurred by the taxpayer are (or are not) capable of influencing the determination of taxable profit and, consequently the tax to be paid, thus understood, in particular, the establishment of different tax rates (article 87 of the CIRC), and in this light the intention of the legislator embodied in paragraph a) of no. 1 of article 45 of the CIRC should be understood, in excluding for the determination of taxable profit the "Corporate Income Tax (IRC) and any other taxes that directly or indirectly affect the profits", here and as such, including the "autonomous taxation".

On the other hand, the tribunal does not overlook the problematization regarding the nature and characteristics of autonomous taxation, when confronted with the tax on the income of legal entities.

But the truth is that, if the sense desired by the legislator were dissenting from not including them in the said paragraph a), he would have provided for it.

What it effectively did not do, assimilating autonomous taxation with the tax on the income of legal entities for purposes of procedure and form of assessment and rules of payment (articles 89 et seq and 104 of the CIRC).

And, if indeed not constituting autonomous taxation Corporate Income Tax (IRC) in the strict sense, it is nonetheless intertwined therewith, and should be contained and for the question that underlies, in the "other taxes" of which the final part of paragraph a) of no. 1 of article 45 of the CIRC gives us account.

Revelations of this connection of functionality, and within the framework of the legislator's intention as a whole, stand out, for example from the regulation of article 12 of the CIRC regarding entities subject to the tax transparency regime, in not taxing them in Corporate Income Tax (IRC), "except as regards autonomous taxation", a relationship that likewise manifests itself in the face of no. 14 of article 88 of the CIRC, in the sense that the autonomous taxation rates take into account the fact of the taxpayer presenting or not fiscal loss.

The "dual nature" of autonomous taxation or the response "to the admittedly difficult question of the tax regime of expenses that find themselves in the zone of intersection of the personal sphere and the business sphere, so as to avoid remuneration in kind more attractive for exclusively fiscal reasons or the hidden distribution of profits", to which Saldanha Sanches [5] calls us, does not subtract the interpretation, which we have been sketching, in the sense that autonomous taxation are still a component included in the expenses incurred by way of Corporate Income Tax (IRC).

Analyzed moreover under another prism, it must be considered autonomous taxation in the context of specific anti-abuse rules and its similarity with the regime provided under no. 1 of article 65 of the CIRC, "the amounts paid or owed, in any capacity, to individual persons or legal entities residing outside the Portuguese territory and there subject to a clearly more favorable tax regime, are not deductible for purposes of taxable profit, unless the taxpayer can prove that such expenses correspond to effectively realized operations and do not have an abnormal character or an exaggerated amount".

This is to say that the legislator, within the scope of the legislative discretion of which account has been given, could have opted regarding the regime of autonomous taxation for their inadmissibility for purposes of the provision in article 23 of the CIRC, which does not verify itself "in allowing the deductibility of the expenses in question, against the immediate payment of a portion of the taxable profit that, presently or in the future will be affected by such deduction".

The "dual nature" of which Saldanha Sanches gives us account and according to the same, is also revealed by the fact that the costs associated with autonomous taxation, cease not to be invested, in some sense, "a kind of presumption that these costs do not have a business cause and, therefore, are subject to autonomous taxation. In summary, the cost is deductible, but autonomous taxation reduces its tax advantage, since, here, the base of incidence is not net income, but rather a transformed cost – exceptionally made the object of taxation".[6]

It is understood, in this line, that it will be legitimate to conclude that if the outlay on which autonomous taxation is applied is not, in itself, deductible, it is because (for the purposes of the Corporate Income Tax (IRC) system) it is not necessary for the realization of income subject to tax or for the maintenance of the income-producing source.

Now, if this is so, the autonomous taxation that affects it likewise will not be, whereby it would be admitted the deduction of an expense in frontal disagreement with the general principle that expenses are only deductible in the context of Corporate Income Tax (IRC) if inherent to them such necessity for the realization of income subject to tax or for the maintenance of the income-producing source.

Furthermore, it is finally added that article 3 of Law 2/2014, of 16 January, added article 23 A) to the CIRC (while at the same time its article 13 repealed article 45) with the following wording:

Article 23 A) - Expenses not 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 tax period:

a) the Corporate Income Tax (IRC), including autonomous taxation, and any other taxes that directly or indirectly affect the profits".

There subsisting no doubts, in our understanding, regarding the interpretive character of the transcribed provision, in accordance with the good rules of legal hermeneutics, in practice, such rule comes to express what the legislator always understood and continues to understand, namely that the expenses arising as the cost associated with autonomous taxation, do not matter for purposes of determining taxable profit.

Resulting, in the circumstances of the present proceedings, that the expenses which the Claimant deducted or sought to deduct, under the provision in article 23 of the CIRC, do not constitute deductible expenses for purposes of determining its taxable profit, the request for arbitral pronouncement will thus be unfounded.

IV DECISION

In accordance with the foregoing, the present Arbitral Tribunal agrees to:

a) Judge the present request for arbitral pronouncement as wholly unfounded and, in consequence,

c) Absolve the Respondent, the Tax Authority and Customs Authority, therefrom.

V. VALUE OF THE CASE

In accordance with the provision in art. 306, nos. 1 and 2, of the CPC [Code of Civil Procedure] and 97-A, no. 1, paragraph a), of the CPPT [Code of Tax Procedure] and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings the value of the case is set at € 386,296.22.

VI. COSTS

In accordance with article 22, no. 4, of the RJAT, the amount of the costs is set at € 6,426.00 (six thousand four hundred and twenty-six euros), in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne exclusively by the Claimant.

Lisbon, 2 October 2014

The Arbitrators

(José Poças Falcão)

(Luís Menezes Leitão)

(Henrique Curado)

[1] The documents referred to without further mention were attached by the claimant with the arbitral request.

[2] A question already submitted to the appreciation of CAAD, within the scope of tax arbitration, at least in case nos. 187/2013-T, 209/2013-T, 210/2013-T, 246/2013-T, 255/2013-T, 260/2013-T and 282/2013-T and 6/2014-T [in which the president and reporter of the panel was also the same person who also presides over this Tribunal].

[3] Currently, there are various types of autonomous taxation that we find in article 88 of the Corporate Income Tax Code:

i) Autonomous taxation on undocumented expenses;

ii) Autonomous taxation on vehicle expenses;

iii) Autonomous taxation on representation expenses;

iv) Autonomous taxation on amounts paid or owed, in any capacity, to individual persons or legal entities residing outside the Portuguese territory and there subject to a clearly more favorable tax regime;

v) Autonomous taxation on expenses with travel allowances and compensations for workers' displacement in own vehicle in service of the employing entity;

vi) Autonomous taxation on profits distributed by entities subject to Corporate Income Tax (IRC) to taxpayers who benefit from total or partial exemption;

vii) Autonomous taxation on expenses or charges relating to indemnifications or any compensations owed not related to the achievement of previously defined productivity objectives in the contractual relationship, when there is termination of functions of manager, administrator or managing partner, as well as on the expenses relating to the portion that exceeds the value of remuneration that would be earned by the performance of such offices until the end of the contract, when it concerns rescission of a contract before its term;

viii) Autonomous taxation on expenses or charges relating to bonuses and other variable remuneration paid to managers, administrators or managing partners.

[4] It will follow closely what results from case no. 260/2013-T and case no. 6-2014-T (it is presumed not yet published), in which the president and reporter of the panel was also the same person who also presides over this Tribunal.

[5] Manuel de Direito Fiscal [Manual of Tax Law], Coimbra Editor, 3rd edition, pp. 406 and 407

[6] Work and place cited.

Frequently Asked Questions

Automatically Created

Are autonomous taxation charges (tributações autónomas) deductible as costs for IRC (corporate income tax) purposes in Portugal?
Yes, according to the claimant's position supported by CAAD precedent (case 7/2011-T), autonomous taxation charges are deductible as business expenses for IRC purposes. The legal reasoning is that autonomous taxation represents a distinct tax mechanism separate from IRC itself - evidenced by the fact that even IRC-exempt entities must pay autonomous taxation under article 81(2) CIRC. Therefore, payments of autonomous taxation on vehicles, representation expenses, bonuses, and other categories constitute genuine business costs that should reduce taxable profit when calculating IRC liability. However, this position was initially rejected by the Tax Authority, necessitating arbitration proceedings.
What is the legal procedure to challenge an IRC self-assessment involving autonomous taxation deductibility at the CAAD?
The legal procedure involves three stages: (1) First, complete the IRC self-assessment through Form 22 submission; (2) Second, file an administrative objection (reclamação graciosa) with the competent Tax Authority office challenging the self-assessment; (3) Third, after receiving rejection of the administrative objection, request constitution of an Arbitral Tribunal at CAAD under articles 2(1)(a) and 10 of Decree-Law 10/2011 and Ordinance 112-A/2011. The arbitration request must specify the challenged acts (both the rejection decision and the underlying self-assessment) and quantify the tax amount in dispute. The CAAD Ethics Council then appoints arbitrators to form the tribunal.
Can a taxpayer file a gracious complaint (reclamação graciosa) before requesting tax arbitration at the CAAD for IRC disputes?
Yes, filing a gracious complaint (reclamação graciosa/administrative objection) before CAAD arbitration is not only possible but was the exact procedure followed in this case. The taxpayer filed the administrative objection on August 30, 2013, with the Large Taxpayers Unit, challenging the IRC self-assessment for 2010. After the Tax Authority rejected this objection by decision of November 6, 2013 (notified November 13, 2013), the taxpayer then proceeded to request CAAD arbitration. This demonstrates that administrative objection serves as a preliminary administrative remedy before resorting to tax arbitration, though taxpayers may also proceed directly to arbitration under certain circumstances pursuant to Decree-Law 10/2011.
How does the denial of autonomous taxation deductibility affect the calculation of IRC and municipal surcharge (derrama)?
Denying autonomous taxation deductibility significantly increases both IRC and municipal surcharge liabilities. In this case, the €1,335,971.71 in non-deducted autonomous taxation resulted in €386,296.22 in excessive tax comprising: (1) IRC at the reduced rate of 17.5% on 1% of profits allocated to a specific establishment (€2,337.95); (2) IRC at the standard 25% rate on the remaining taxable profit (€330,653); (3) State surcharge at 2.5% on the taxable base (€33,399.29); and (4) Municipal surcharge (derrama) at 1.49% (€19,905.98). The denial prevents the autonomous taxation expense from reducing the taxable base used to calculate all these levies, creating a compounding effect across multiple tax obligations.
What was the CAAD arbitral tribunal's decision on the fiscal relevance of autonomous taxation charges for the 2010 tax year?
While the full tribunal decision is not included in the excerpt, the claimant's petition extensively referenced CAAD case 7/2011-T as persuasive precedent supporting the deductibility of autonomous taxation charges. That earlier award, decided by Counsellor Judge Brandão de Pinho, Professor Manuel Pires, and Professor Ana Paula Dourado, apparently upheld the position that autonomous taxation represents a cost separate from IRC itself. The claimant emphasized that autonomous taxation's raison d'être - applying even to IRC-exempt entities under article 81(2) CIRC - demonstrates its distinct nature from IRC, supporting the conclusion that such charges should qualify as deductible business expenses when calculating IRC taxable profit for the 2010 tax year.