Summary
Full Decision
ARBITRAL DECISION
REPORT
A…, S.A., Tax Identification Number (NIPC)…, with registered office at Rua de …, no.…, …-… Leiria (hereinafter, the "Applicant"), came, pursuant to the terms and for the purposes of Articles 2, No. 1, subparagraph a) and 10, No. 1, subparagraph a) of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime for Tax Arbitration (hereinafter, "RJAT"), to request the establishment of an Arbitral Tribunal, with the intervention of a single arbitrator, in which the Tax and Customs Authority (hereinafter, "Respondent" or "AT") is the Respondent, with a view to the declaration of illegality and consequent annulment of the additional assessment of Corporate Income Tax (hereinafter, "IRC") No. 2016…, of 30 September 2016, relating to the fiscal year 2014, as well as the Statement of Accrual of Compensatory Interest No. 2016…, of 30 September 2016, and the consequent Statement of Account Adjustment, identified by No. 2016…, issued on 30 September 2016, from which results the amount of €33,805.80.
The Applicant invokes, in summary, that:
The credit which was the subject of the corrections made by AT originated from a partial payment (advance) made to company B… (hereinafter "B…"), for payment of a machine for the manufacture of plastic articles (hereinafter the "machine"), which was indispensable to its production line.
B… entered into a situation of insolvency, having, moreover, had the respective insolvency petition presented before the Insolvency Section of the Bologna Court.
The machine was not delivered to it due to B…'s situation of insolvency, whereby it suffered a "loss" corresponding to the value of the partial payment (advance) made of €262,500.00, corresponding to 30% of the total agreed value (€875,000.00).
In the context described, the Applicant reflected the said loss through accounting by recording it as a doubtful debt and proceeded to the corresponding deduction as an expense of the fiscal year.
In accordance with Article 35, No. 1, subparagraph a) of the IRC Code, in the wording in force at the date of the facts (current Article 28-A, No. 1, subparagraph a)), the following values are deductible from taxable profit corresponding to credits that meet the following requirements:
Emerge from the normal activity of the company;
Their collection is doubtful; and
Are evidenced in the accounting as doubtful debts.
An uncollectible credit derived from the normal activity of a company is capable of being deducted from the taxable profit of the period in which that "loss" was recorded.
The amount subject to correction - €131,250.00 – corresponding to the advance payment for the machine ordered from company B…, constitutes a fiscally accepted expense for the purposes of Article 35, No. 1, subparagraph a) of the IRC Code, since its purpose was the integration into its production process.
The disregard, as a deductible cost, is not compatible with the constitutional principle of taxation on actual profit, as a corollary of the principles of material justice and equality.
Having the full debt been paid, the right to indemnifying interest should be recognized following the annulment of the IRC assessment and the accrual of compensatory interest.
For its part, AT argues that:
The expense, reflected in the accounting as an "impairment" for receivables, does not meet the requirements laid down in law to be considered a "loss" capable of deduction, since:
The value recorded as "impairment" for receivables cannot be considered as a cost arising from the "normal activity" of the Applicant. In fact, making use, in particular, of Opinion No. 115/95 of the Tax Studies Center, AT argues that only credits against customers, resulting from transactions of goods and services related to the company's activity, are capable of being considered "credits resulting from normal activity";
Being an advance, it was merely a financial option of the Applicant and, as such, incapable of being deductible for tax purposes.
The acquisition of a machine does not meet the requirements of the normal activity of the company, since, being an asset of its tangible fixed assets, it is intended to be held with continuity or permanence and not to be sold or transformed in the normal course of the company's operations.
The advance to a supplier consists of a mere financial operation, an operation which has come to be understood as outside the scope of normal activity and, therefore, not falling within Article 35, No. 1, subparagraph a) of the IRC Code.
Should the Applicant have affirmed that the supplier of the asset is in a situation of insolvency, it will have to make efforts to claim the alleged credit, in order to subsequently be reimbursed upon the distribution.
For IRC purposes, deductions from obtained income are permitted, provided that the law admits their deduction for the purposes of calculating taxable profit, rectius, provided that:
Have been correctly recorded for the purpose of calculating accounting results, and
The law does not impose correction for the purposes of determining taxable profit,
Wherefore, the question under analysis in the present proceedings is related to the correct accounting regime for the costs in question - in light of the accounting rules - and the possible correction of the accounting result for IRC taxation purposes, being necessary to assess whether the accounting in question was effected in accordance with the applicable accounting norms and guidelines.
Accepted as tax expenses, pursuant to Article 23, No. 1 of the IRC Code, are those contained in the accounting provided they are proven and indispensable, further deducing from the same article that the absence of any one of these requirements will result in their non-consideration, whereby such amounts should then be added to the accounting result of the fiscal year.
In sum, there are two reasons for the non-acceptance of this impairment as an expense of the fiscal year for tax purposes: (i) the fact that it is an asset of tangible fixed assets and (ii) the fact that it is an advance.
Interpreted and applied the legal and tax norms in accordance with the legal precepts and promoted the consequent corrections, within the scope of the principle of legality to which its activity conforms; and
There was no "error attributable to the services," for which reason there is no place for the payment of indemnifying interest.
THEMA DECIDENDUM
In accordance with the matter previously discussed, it is necessary to define whether an advance of the price for the acquisition of a machine that will form an integral part of the Applicant's tangible fixed assets may be deductible pursuant to Article 23 of the IRC Code.
In fact, notwithstanding the Respondent, in Article 28 of its Response, referring to the fact that in the present proceedings, what is at issue is not the acceptance as a cost, but rather whether the situation in question is capable of being classified under Article 28-A, No. 1, subparagraph a) of the IRC Code (former Article 35 of the IRC Code), it appears to us that the substantive issue to be decided is whether the advance of the price of a machine that was never delivered, and which would be integrated into the Applicant's tangible fixed assets, is or is not capable of being considered a deductible cost under Article 23 of the IRC Code.
Notwithstanding the position taken (hereinafter) regarding the classification as impairment, given that the list provided for in Article 23, No. 2 of the IRC Code is merely exemplary - which results from the use of the adverb "namely" - even if it were impossible to fit the expense or loss to the said list, it would always be considered deductible provided it was incurred or borne by the taxpayer to obtain or guarantee the income subject to IRC.
In fact, Portuguese courts have pronounced themselves repeatedly with regard to the fact that the list present in Article 23, No. 2 of the IRC Code is merely exemplary.
The STA, for example, has come to state that:
"[i]n the case sub judice what is at issue is not the proving of the effectiveness of the cost, which AT accepts, but only its indispensability. It is thus incumbent upon us to inquire into what this indispensability consists of, since the law, notwithstanding the exemplary statement of the various concrete categories of deductible expenses contained in the various subparagraphs of the said Art. 23 – among which are included 'fiscal and parafiscal expenses' – requires the proof of the indispensability of the cost in obtaining the income and not merely the proof of the possibility of obtaining such income." (See Decisions of the STA of 15/11/2017, issued in process No. 0372/16 and of 28/06/2017, issued in process No. 0627/16, in www.dgsi.pt) (emphasis ours).
"[i]n Art. 23, No. 1, of the same Code specify which expenses [formerly, costs or losses] that the law deems relevant. Following a broad definition of the concept of tax expenses – 'those which provably are indispensable for the realization of income subject to tax or for the maintenance of the productive source' – the rule makes a merely exemplary enumeration, in which it includes 'realized losses'" [see subparagraph l)].'' (See Decision of the STA of 17/02/2016, issued in process No. 01401/14, in www.dgsi.pt) (emphasis ours).
"[a]lso of interest was Article 23, No. 1 of the CIRC which provided that costs or losses are considered those which provably are indispensable for the realization of income or gains subject to tax or for the maintenance of the productive source, subsequently enumerating in the various subparagraphs, and in an exemplary manner, some of the costs or losses to which fiscal relevance should be attributed." (See Decision of the STA of 09/09/2015, issued in process No. 028/15, in www.dgsi.pt) (emphasis ours).
The academic literature has also come to pronounce itself in this sense. In fact:
Rui Duarte Morais refers, regarding the technique of using the list provided for in the said Article 23, No. 2 of the IRC Code, that "we understand it as being a compromise between the need to establish an indeterminate concept of costs or losses – so varied can be the life situations that originate them, making it impossible a casuistic enumeration – and the requirement to comply, as far as possible, with the principle of typicality; This exemplary enumeration thus results in greater security." He further adds that "Art. 23, following the same technique used with respect to income, exemplifies some of the types of fiscally deductible costs."; (See Rui Duarte Morais, Notes on IRC, Coimbra: Almedina, 2009, p. 91) (emphasis ours).
Also, António Moura Portugal refers that "jurisprudence does not deny any value to the exemplary enumeration, but that it is far from being the intended indispensability ex lege." (See António Moura Portugal, The Deductibility of Costs in Portuguese Tax Jurisprudence, Coimbra: Coimbra Editora, 2004, p. 271) (emphasis ours).
In the same sense, Tomás Maria Cantista de Castro Tavares sustains that "[t]he legal technique that presides over the explanation of the fiscal regime for costs unfolds in two dimensions. In fact, following the delimitation of the general notion of expense (Art. 23, No. 1, of the CIRC), aided by an exemplary catalogue (in the various subparagraphs of that article), certain exception-situations are subsequently established, supported by rules of equal weight, where the fiscal deductibility of certain losses is precluded (cf., especially, Art. 32 and Art. 41, of the CIRC)." (See Tomás Maria Cantista de Castro Tavares, On the Relationship of Partial Dependence between Accounting and Tax Law in the Determination of the Taxable Income of Legal Entities: Some Reflections at the Level of Costs, Tax Science and Technique Notebooks, No. 396, Bulletin of the Directorate-General of Taxes, October-December, 1999, p. 111) (emphasis ours).
And in the same sense AT pronounces itself in its response to the request for arbitration opinion from the Applicant by affirming that "[i]t is settled, in the literature and in jurisprudence, that the rule contains a definition of the type general clause of the concept of cost, followed by an exemplary enumeration of costs normally accepted as fiscally deductible." (See Article 34 of the Respondent's Response).
The substantive question thus seems to relate more to the possibility of deducting the expense, rather than of fitting it to a certain subparagraph, since the deductibility of the expense would imply the annulment of the assessment under analysis. Notwithstanding the foregoing, as we have already mentioned, we will take a position regarding the classification as impairment.
DECISION
MATTERS OF FACT
A.1. Facts established as proven
The Applicant is a commercial company whose activity results in the manufacture of plastic packaging (CAE Code 22220).
The Applicant is a taxpayer under the general IRC regime and a taxpayer of VAT, classified under the normal regime of monthly periodicity.
The Applicant considered as an expense of the fiscal year 2014 the amount of €131,250.00, relating to Impairment of Receivables which, consequently, is reflected in the determination of the taxable profit of said fiscal year.
In the course of its activity, the Applicant was subject to an inspection procedure, covering the IRC of the fiscal year 2014, having been carried out under Service Order No. OI2016….
Following said inspection procedure, by Official Notice dated 29 July 2016, the Applicant was also notified of the Draft Corrections to the Inspection Report, according to which the inspection procedure was instituted with the objective of correcting the expenses recorded as "impairment," in the amount of €131,250.00, resulting from a doubtful debt.
The Applicant exercised the Right of Prior Hearing, reiterating that the expense meets the requirements for its classification as impairment deductible for tax purposes, with AT maintaining its understanding upon issuance of the Tax Inspection Report.
It thus results from the Inspection Report a corrected Taxable Profit of €160,521.53.
The additional assessment of Corporate Income Tax No. 2016…, of 30 September 2016, the Statement of Accrual of Compensatory Interest No. 2016…, of 30 September 2016, and the Statement of Account Adjustment No. 2016…, were issued, from which results a total amount of tax and compensatory interest to be paid in the amount of €33,805.80.
The Applicant proceeded to pay the amount of tax, on 20 December 2016, under the Special Program for Reduction of Indebtedness to the State approved by Decree-Law No. 67/2016, of 3 November.
The credit deducted by the Applicant and which was the subject of the corrections made by the Tax and Customs Authority originated from a partial payment (advance) made to company B…, for acquisition of a machine of the C… brand, model …-PRO2-L.
Said credit is recorded in the Applicant's accounting as a doubtful debt.
The difficult economic situation of company B… culminated in the presentation of an insolvency petition.
Said machine, intended for the manufacture of plastic articles, was indispensable to the Applicant's production line and would be acquired by it for a total value of €875,000.00.
The amount of €262,500.00 corresponds to 30% of the total agreed value (€875,000.00), between the Applicant and company B….
The machine was never delivered to the Applicant, nor was the advance returned.
A.2. Facts established as not proven
With relevance to the decision, there are no facts that should be considered as not proven.
A.3. Grounds for the factual matters proven and not proven
Regarding matters of fact, the Tribunal need not pronounce on everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to distinguish the proven from the unproven matters [See Article 123, No. 2, of the Code of Tax Procedure and Process (hereinafter, "CPPT") and Article 607, No. 3 of the Code of Civil Procedure (hereinafter, "CPC"), applicable by virtue of Article 29, No. 1, subparagraphs a) and e) of the RJAT].
In this manner, the facts pertinent to the judgment of the case are chosen and delimited according to their legal relevance, which is established in view of the various plausible solutions to the questions of Law.
Thus, taking into account the positions assumed by the parties, in light of Article 110, No. 7 of the CPPT, the documentary evidence and the Administrative Procedure file attached to the case, as well as the testimonial evidence produced, the facts listed above were considered proven, with relevance to the decision.
In particular, with regard to the facts established as proven in points 21 to 26, the testimony of the witnesses questioned was taken into account, which revealed direct knowledge of the facts as they were considered proven, and testified in a logical and coherent manner, among themselves and with the available documentary evidence, demonstrating credibility.
Allegations made by the parties were neither considered proven nor unproven, and presented as facts, consisting of statements strictly of law or conclusive in nature, insusceptible of proof, and whose truthfulness must be assessed in relation to the concrete facts of fact consolidated above.
B. ON THE LAW
As a preliminary point – and as results even from the considerations above – during the fiscal year 2014, the IRC Code had two versions: the first until 20 January 2014 and the second as of 21 January.
Until 20 January 2014, Article 23 of the IRC Code provided:
"1 - Expenses are considered those which provably are indispensable for the realization of income subject to tax or for the maintenance of the productive source, in particular:
a) Those relating to the production or acquisition of any goods or services, such as materials used, labor, energy and other general production, conservation and repair expenses;
b) Those relating to distribution and sale, encompassing transport, advertising and placement of merchandise and products;
c) Of a financial nature, such as interest on borrowed capital applied in business, discounts, premiums, transfers, exchange differences, expenses with credit operations, collection of debts and issuance of bonds and other securities, redemption premiums and those resulting from the application of the effective interest method to financial instruments valued at amortized cost;
d) Of an administrative nature, such as remuneration, including those attributed by way of participation in profits, allowances, ordinary consumption materials, transport and communications, rents, litigation, insurance, including life insurance and 'Life' branch operations, contributions to savings-retirement funds, contributions to pension funds and to any supplementary social security schemes, as well as expenses with employee termination benefits and other post-employment or long-term benefits;
e) Those relating to analyses, rationalization, research and consultation;
f) Of a fiscal and parafiscal nature;
g) Depreciations and amortizations;
h) Adjustments in inventories, impairment losses and provisions;
i) Expenses resulting from the application of fair value in financial instruments;
j) Expenses resulting from the application of fair value in edible biological assets that are not plural-year forestry exploitations;
l) Realized losses;
m) Indemnifications resulting from events whose risk is not insurable."
From 21 January 2014, Article 23 of the IRC Code was reworded as follows:
"1 - For the determination of taxable profit, all expenses and losses incurred or borne by the taxpayer to obtain or guarantee the income subject to IRC are deductible.
2 - The following expenses and losses are considered covered by the preceding number, in particular:
a) Those relating to the production or acquisition of any goods or services, such as materials used, labor, energy and other general production, conservation and repair expenses;
b) Those relating to distribution and sale, encompassing transport, advertising and placement of merchandise and products;
c) Of a financial nature, such as interest on borrowed capital applied in business, discounts, premiums, transfers, exchange differences, expenses with credit operations, collection of debts and issuance of bonds and other securities, redemption premiums and those resulting from the application of the effective interest method to financial instruments valued at amortized cost;
d) Of an administrative nature, such as remuneration, including those attributed by way of participation in profits, allowances, ordinary consumption materials, transport and communications, rents, litigation, insurance, including life, illness or health insurance, and 'Life' branch operations, contributions to savings-retirement funds, contributions to pension funds and to any supplementary social security schemes, as well as expenses with employee termination benefits and other post-employment or long-term benefits;
e) Those relating to analyses, rationalization, research, consultation and development projects;
f) Of a fiscal and parafiscal nature;
g) Depreciations and amortizations;
h) Impairment losses;
i) Provisions;
j) Losses due to reductions in fair value in financial instruments;
k) Losses due to reductions in fair value in edible biological assets that are not plural-year forestry exploitations;
l) Realized losses;
m) Indemnifications resulting from events whose risk is not insurable."
Still with relevance for the concrete case, Article 35 of the IRC Code (current Article 28-A of the IRC Code) provided until 20 January 2014 that:
"1- The following impairment losses recorded in the same tax period or in previous tax periods may be deducted for tax purposes:
a) Those related to credits resulting from normal activity which, at the end of the tax period, may be considered doubtful and are evidenced as such in the accounting;"
Being that, as of 21 January 2014, it was no longer Article 35 that governed the matter but rather Article 28-A of the IRC Code:
"1- The following impairment losses, when recorded in the same tax period or in previous tax periods, may be deducted for tax purposes:
a) Those related to credits resulting from normal activity, including interest for delay in fulfillment of obligation, which, at the end of the tax period, may be considered doubtful and are evidenced as such in the accounting;"
Let us examine the substantive question:
The Constitution of the Portuguese Republic (hereinafter, "CRP") determines that the taxation of companies must be based fundamentally on their actual income (See Article 104, No. 2 of the CRP).
The deductibility of expenses and losses is a result of the constitutional principle of contributive capacity in that it imposes taxation of the net income of companies, which implies the deduction of expenses related to obtaining the income (See António Moura Portugal, The deductibility of costs in Portuguese tax jurisprudence, Coimbra: Coimbra Editora, 2004, p. 31, Sérgio Vasques, Manual of Tax Law, Coimbra: Almedina, 2015, p. 299).
In this sense, Tomás Maria Cantista de Castro Tavares affirms that "contributive capacity calls, from the outset, for a tax on actual income. In fact, with respect to the taxation of companies, this consideration was elevated to the dignity of express constitutional status (see No. 2 of Art. 104 of the CRP). The legislator, among two typical possible solutions, that is, incidence on actual or normal (average) profits, opted for the former equation to the detriment of the latter. Consequently, income actually verified within the company is taxed, rather than what would be obtained under usual conditions (invariably, beyond or below reality)," adding that "the archetype of taxation of actual and real income communicates to that desideratum two essential notes, by incidence on net income and accrual. In general, income may be viewed in terms of gross or net, depending on the disclosure of the impoverishment undertaken. The first model ignores expenses connected with the creation of income (or, at least, does not assess them with depth and total accuracy). In the taxation of net revenues, on the contrary, the tax encompasses the wealth actually generated in a given period, by deduction from income (positive components) of all costs linked to its obtaining (negative components). Now, upon closer inspection, taxation in accordance with economic capacity is only realized in this latter model, for only it translates, with accuracy, the actual profit." (See Tomás Maria Cantista de Castro Tavares, On the Relationship of Partial Dependence between Accounting and Tax Law in the Determination of the Taxable Income of Legal Entities: Some Reflections at the Level of Costs, Tax Science and Technique Notebooks, No. 396, Bulletin of the Directorate-General of Taxes, October-December, 1999, pp. 31 and 32).
Also, Rui Duarte Morais argues that "following what we believe to be settled doctrine and jurisprudence, that the taxpayer should be admitted to complete proof of the existence of the cost through the use of any means permitted in law. For the non-acceptance, for reasons of merely formal nature, of the deductibility of a cost that effectively was borne, would correspond to taxation on a profit that does not exist, to a tax which does not underlie the corresponding contributive capacity." (See Rui Duarte Morais, Notes on IRC, Coimbra: Almedina, 2007, p. 80).
In this manner, the disregard of costs should be surrounded by due care, since it equally implies the removal or limitation of the application of a constitutional principle.
On the other hand, it has come to be advocated, both by academic literature and by jurisprudence, including that of this arbitral tribunal, that taxpayers enjoy a broad margin of discretion in the consideration of what should, or should not, be considered as deductible from the determined results.
In fact, according to the STA:
The "criterion of indispensability was created by the legislator not to permit the Tax Administration to interfere in the management of the company by dictating how it should apply its means but to prevent the fiscal consideration of expenses which, although known as costs, do not fall within the scope of the company.
Rui Duarte Morais argues in Notes on IRC Almedina Coimbra 2007 pp87 that the cost must be considered indispensable "whenever the expense that originates it derived from a genuine business motivation – the understanding of the shareholders and/or managers of the company, the only ones to whom it falls to decide on the corporate interest".
Following also António Moura Portugal who in The Deductibility of Costs in Portuguese Tax Jurisprudence Coimbra Editora 2004 pp1133 et seq argues that indispensability must be interpreted according to the corporate object. Ceasing to be tolerable the use of the criterion of reasonableness as a basis for quantitatively limiting the expenses incurred by taxpayers. Indispensability should be assessed from a positive judgment of the subsumption in the corporate activity, which by nature should not be reviewed by Tax Law, which should not interfere, still less evaluate the business decisions of the taxpayer.
Essential costs thus equal the expenses incurred in the interest of the company.
The fiscal deductibility of the cost should depend only on a justified relationship with the productive activity of the company, and this indispensability is verified whenever, by operation of the theory of the specialty of legal entities, the corporate operations fall within its capacity by subsumption to its respective corporate purpose and especially whenever they connect with the obtaining of profit, whether directly or indirectly.
The costs which pursuant to Article 23 of the CIRC are fiscally relevant will be all those which directly interfere in the corporate object pursued by the plaintiff." (See Decision of the STA of 05/11/2014, issued in process No. 0570/13, in www.dgsi.pt).
"(...) the review to be carried out by AT on the verification of this requirement of indispensability must be by the negative, that is, AT should only disregard as tax costs those which clearly have no potential to generate an increase in earnings, being unable for 'the competent administrative agent to determine the taxable matter to arrogate to itself as manager and qualify indispensability at the level of good and poor management, according to its feeling or personal sense; it suffices that it be an operation carried out as an act of management, without entering into the appreciation of its effects, positive or negative, of the expense or charge assumed for the results of the realization of income or for the maintenance of the productive source" (VÍTOR FAVEIRO, Fundamental Notions of Portuguese Tax Law, volume II, page 601.).
That is, the rule being the freedom of economic initiative and taxation of companies should fall fundamentally on their actual income (cf. the aforementioned Art. 104, No. 2, of the CRP), the rule of No. 1 of Art. 23 of the CIRC, in the wording in force in 2001, by limiting the relevance of costs to those "which provably are indispensable for the realization of income or gains subject to tax or for the maintenance of the productive source" must be understood as permitting the fiscal relevance of all expenses actually concretized which are potentially suited to providing income or gains, independently of the result (success or failure) which in concrete they provided." (See Decision of the STA of 24/09/2014, issued in process No. 0779/12, in www.dgsi.pt).
The "[…] criterion of indispensability was created by the legislator, not to permit the Administration to interfere in the management of the company, dictating how it should apply its means, but to prevent the fiscal consideration of expenses which, although recorded as costs, do not fall within the scope of the activity of the company, were incurred not for its pursuit but for other outside interests. (...) The concept of indispensability not only cannot be equated to a strict judgment of imperative necessity, as has been said, but also cannot rest on a judgment about the convenience of the expense, made necessarily a posteriori. For example, expenses made with an advertising campaign that proved fruitless cannot, solely on the basis of that result, be affirmed to be dispensable. The judgment on the opportunity and convenience of expenses is exclusive to the businessman. If he decides to make expenses with a view to pursuing the object of the company but is unsuccessful and those expenses prove, in the end, unprofitable, they do not cease to be tax costs. But any expense that records as a cost and shows itself foreign to the purpose of the company is not a tax cost, because not indispensable. We understand, therefore, that fiscally deductible expenses are all those expenses which relate directly to the production process (for our case, it does not matter to consider investment expenses), in particular, the acquisition of production factors, as is the case of labor. And that, under penalty of violation of the principle of contributive capacity, the Administration can only exclude expenses not directly excluded by law under a strong motivation that convinces that they were incurred beyond the corporate objective, that is, in the pursuit of another interest that is not business, or, at least, with clear excess, deviant, in light of the objective needs and capacities of the company." (See Decision of the STA of 29/03/2006, issued in process No. 01236/05, in www.dgsi.pt).
This Arbitral Tribunal has also produced identical jurisprudence, deciding that:
"(...) provided that the orientation of the expenses is for the pursuit of the company's activity and, consequently, for the obtaining of profit, it is understood that the criterion of indispensability is met, being outside the scope of the Tax and Customs Authority to make value judgments about the goodness of the business management pursued by the Applicant." (See Decision of the CAAD of 20/07/2017, issued in process No. 79/2017-T, in https://caad.org.pt/tributario/decisoes/).
"[i]t suffices that they be acts which may be accepted as acts of management, acts of the type that a company would realize with the objective of increasing income and with potential capability for providing such increase." (See Decision of the CAAD of 02/12/2013, issued in process No. 101/2013-T, in https://caad.org.pt/tributario/decisoes/).
"[t]aking into account the jurisprudence of the superior courts (duly cited by the parties, in particular by the Respondent [namely, Judgment of the STA 186/06, of 12/7/2006; 107/11 of 30/11/2011; 1077/08, of 20/5/2009; 246/02, of 10/7/2002 and Judgment of the TCA South 5251/11, of 24/4/2012, consulted in www.dgsi.pt]) and the teachings of the academic literature that has focused on the subject (abundantly cited by the parties, in particular by the Respondent) including a work of which the arbitrator is an author (Tomás Cantista Tavares, On the relationship of partial dependence between accounting and Tax Law in the Determination of the Taxable Income of Legal Entities: some reflections at the level of costs, CTF 396, October-December 1999 and António Portugal, The deductibility of costs in Portuguese Tax Jurisprudence, Coimbra Editora, 2004), we can establish the following corollaries, accepted by all these sources, regarding the case at hand: 1. Art. 23 of the CIRC contains an open clause, which requires interpretation and application to the concrete case (without the Tax Administration being able to enter into a judgment of opportunity or technical discretion), by which only expenses indispensable for the realization of income subject to tax or for the maintenance of the productive source are fiscally accepted. 2. The indispensability between costs and income is assessed in an economic sense: essential costs are those incurred in the interest of the company, which are linked with its capacity, by inclusion in its lucrative scope (in a mediate or immediate manner) and in the exercise of its concrete activity. 3. The Tax Administration cannot review the goodness and opportunity of the company management's economic decisions. It cannot interfere with the freedom and autonomy of management of the company. A cost will be accepted fiscally if it is suitable to the company's productive structure and to the obtaining of profits, even if it later proves to be an unprofitable or economically ruinous operation. 4. The essential expense equals any expense incurred in order to obtain income and which represents an economic decline for the company. 5. Art. 23 of the CIRC requires not only an adequate causal connection between the cost and the income (in the said economic terms), but also alternatively connects (as indicated by the word "or") with the maintenance of the productive source – in the sense of an economic link between the expense and the existence and maintenance of the company and its activity. 6. With regard to financial expenses, fiscal costs are interest on borrowed capital applied in business – as indicated in subparagraph c) of No. 1, of Art. 23 of the CIRC, which in the structure of the rule (examples in subparagraphs and general principle in the body of No. 1) is assumed as the realization of the general principle: interest is indispensable when foreign capital is applied in business. 7. Art. 23 of the CIRC merely wishes to refuse the fiscal acceptance of costs which, although thus recorded by the company, are not in reality business costs. These are clearly abusive situations, since such expenses do not fall within the scope of its activity – they were incurred not in the interest of the company, but for the pursuit of outside objectives (for example, to camouflage the personal expenses of administrators). 8. Fiscal cost requires an own and selfish interest of the company that records the cost: such interest must exist autonomously and cannot be diluted in the collective interest or of the group. These considerations enable the resolution of the concrete situation." (See Decision of the CAAD of 08/07/2013, issued in process No. 12/2013-T, in https://caad.org.pt/tributario/decisoes/) (emphasis ours).
In this same sense, as mentioned, the academic literature has equally come to pronounce itself:
Tomás Maria Cantista de Castro Tavares, "[t]he legal notion of indispensability is thus outlined from an economic-business perspective, by filling, direct or indirect, the ultimate motivation of contributing to the obtaining of profit. Essential costs equal the expenses incurred in the interest of the company or, in other words, in all acts abstractly subsumable in a profit-making profile.", that is, the Author argues that the "legal notion of indispensability between positive and negative components of income, on the contrary, only requires a relationship of economic causality, in the sense of the fiscal admissibility of expenses deemed indispensable by the management body, given that they contribute, even if indirectly or mediately, to the perception of income or to the maintenance of the productive source. Now, this desideratum is verified whenever – by operation of the theory of the specialty of the purpose of legal entities – the corporate operations fall within its capacity, by subsumption in its respective statutory purpose and, especially, whenever they connect with the obtaining of profit, even if in an indirect or mediate manner." (See Tomás Maria Cantista de Castro Tavares, On the Relationship of Partial Dependence between Accounting and Tax Law in the Determination of the Taxable Income of Legal Entities: Some Reflections at the Level of Costs, Lisbon: Tax Science and Technique Notebooks, No. 396, October-December, 1999, p. 167).
Also José Casalta Nabais refers that "the principle of free economic availability requires that the greatest possible latitude be permitted for the free decision of the individual in all domains of life, and that the limitation of such freedom of decision is only admitted when, from its unimpeded exercise, damage to the community results, or when the state must take precautions so that such freedom of decision can be conserved and maintained." (See José Casalta Nabais, The Fundamental Duty to Pay Taxes: Contribution to the Constitutional Understanding of the Contemporary Fiscal State, Coimbra: Almedina, 2009, p. 204).
António Moura Portugal argues that indispensability "should be assessed from a positive judgment of the subsumption in the corporate activity. This, in turn, should not be reviewed by the Tax Administration or the courts, because such is required by the freedom of economic initiative." (See António Moura Portugal, The deductibility... op. cit., p. 279).
In the same line, Rui Duarte Morais sustains that "[t]axpayers are, therefore, free in their choices, in particular to decide how to manage their companies, to decide which (in their kind and amount) the expenses they deem convenient for the pursuit of a given economic activity. We have, as a principle inherent to the idea of the Fiscal State, the non-interference of the administration in the management of companies. The invocation of the rule of indispensability of costs can never be made to substitute the judgment of convenience and opportunity of the expenses assumed, as they resulted from the decision of the corporate bodies, for another judgment, also of a business nature, made by the tax administration or the courts.", further stressing that "[i]f the assumption of the expense which originates the cost was presided over by genuine business motivation – in the understanding of the shareholders and/or managers of the company, the only ones to whom it falls to decide on the corporate interest -, the cost is indispensable. When it should be concluded that the expense was determined by other motivations (personal interest of shareholders, administrators, creditors, other companies in the same group, commercial partners, etc.), then such cost should not be considered indispensable." (See Rui Duarte Morais, Notes on IRC, Coimbra: Almedina, 2007, pp. 85 to 87).
Taking as the starting point the letter of the law (Article 23, No. 1 of the IRC Code), which determines that "all expenses and losses incurred or borne by the taxpayer to obtain or guarantee the income subject to IRC are deductible" and having regard to the academic literature and jurisprudence identified above, we consider that there is no reason why the expense incurred by the Applicant should not be considered deductible for tax purposes, i.e., for the expense to be considered to fall within Article 23 of the IRC Code.
The fact that the machine was not delivered should not prevent its classification under Article 23 of the IRC Code. As has already been mentioned above, and reiterated by various authors, even if it were an unsuccessful act from the perspective of management – which was not demonstrated, or even invoked assertively - the expense would still be deductible.
Thus, strictly speaking, what occurred was the commitment of the company's funds (of the Applicant) tending toward the acquisition of a machine that was not delivered, but which would be included in the Applicant's activity. In any case, the funds were effectively used (spent) and were so in the context of a business activity.
It might even always be said that the funds were consumed in a context that occurs with some recurrence in corporate life given the economic conjuncture registered in the recent past.
Naturally, as the Applicant dedicates itself to the manufacture of plastic packaging, the acquisition of a machine necessary for such manufacture cannot be considered abnormal, since, not only does it relate to the activity, but it is essential to it, being assumed as a condition for the manufacture of products sold by the Applicant. It will thus be as normal, within the scope of the Applicant's activity, the sale of products, as the purchase of raw materials or manufacturing instruments.
In fact, "normality" should not be confused with "regularity." The fact that the acquisition of fixed assets is not, in the Applicant's activity, as regular as the sale of the articles manufactured, does not make the acquisition of fixed assets abnormal in light of its activity.
On the other hand, if the machine had been effectively acquired, its cost would always be deductible. Thus, the funds effectively spent for the acquisition of the machine, but which, for reasons not attributable to the Applicant, did not result in an effective acquisition, must be deductible pursuant to Article 23 of the IRC Code.
It is reiterated, basing itself, essentially – and without prejudice to some extensions relating to tax benefits and/or some cases of non-deductibility expressed - the deductibility of expenses and losses on the constitutional principle of contributive capacity, resulting both from Article 13, as from Article 104, No. 2, both of the CRP, would have to be substantive the reasons for limiting the respective right to deduction. Now, in the concrete case, nothing points to an abusive or promiscuous affectation of corporate resources.
In this manner, the "loss" incurred by the Applicant is deductible. This is, in fact, the substantive question which it was essentially necessary to examine, whereby if the amount is deductible, the IRC assessment made by the Respondent, insofar as it disregarded this expense, must be annulled.
The fact that it is an advance does not alter the classification to be followed, since it was equally consumed in the context of business activity.
Moreover, the specific classification (as impairment), carried out by the Applicant, seems to us legitimate and appropriate, since the value of the advance recorded in the accounting differs from the recoverable value. This is because the machine was not delivered and the advance was not reimbursed.
Let us then examine whether a partial payment (advance) for the acquisition of a machine for the manufacture of plastic articles can be considered an "impairment" pursuant to and for the purposes of Article 23, No. 2, subparagraph h) of the IRC Code, in cases where, due to facts not attributable to the Applicant, the machine was not delivered, nor was the amount returned.
In this context, the Respondent invokes, in essence, that the expense was not incurred within the scope of the "normal activity" of the Applicant (being a tangible fixed asset and an advance). This will thus be the point which we will address with greater detail.
Given that the activity of the Applicant results in the manufacture and sale of plastic packaging (CAE 22220), the purchase of a machine for the manufacture of plastic articles has a direct relationship with the Applicant's activity.
The Applicant acquired from company B… a machine for the proper functioning of its corporate purpose.
In view of the circumstance that B… did not have the conditions to fulfill the obligation of delivery of the machine, the Applicant recorded in its accounting a doubtful debt.
Pursuant to Article 35 of the IRC Code – impairment losses fiscally deductible - "1 - The following impairment losses may be deducted for tax purposes, recorded in the same tax period or in previous tax periods: a) Those related to credits resulting from normal activity which, at the end of the tax period, may be considered doubtful and are evidenced as such in the accounting;" (bold and underlined).
Now, it results from the above transcribed article that credits which meet three requirements are deductible: (i) result from the normal activity of the company; (ii) their collection is doubtful; and (iii) are evidenced in the accounting as doubtful credits.
With respect to the first requirement (i) (credits resulting from the normal activity of the company), it seems to result clearly from the facts proven that the machine acquired was absolutely essential for the pursuit of the Applicant's corporate purpose, falling, in the opinion of this Tribunal, within the concept of normal activity of the taxpayer, as has been argued above.
Normal activity encompasses acts which permit the direct or indirect realization of the corporate purpose. For example, a company which dedicates itself to the Purchase and Sale of real estate has to buy the real estate to, subsequently, sell them.
In fact, the Applicant's normal activity consisting of the manufacture for sale of plastic packaging, the purchase of a machine for the manufacture of plastic articles, that is, the acquisition of an asset necessary for the realization of the purpose, is an acquisition related to the company's normal activity. In this sense, the TCA-S determined that "credits resulting from the normal activity of the company are the debtor balances of clients and suppliers at the end of the fiscal year duly evidenced in appropriate accounts"." (See Decision of the TCA-S of 23/02/2010, issued in process No. 03751/10, in www.dgsi.pt).
In the same sense, the Decision of the TCA-S: "[t]hus, and first and foremost, credits must result from the normal activity of the company and it has been understood that credits resulting from the normal activity of the company are the debtor balances of clients and suppliers at the end of the fiscal year duly evidenced in appropriate accounts." (See Decision of the TCA-S of 15/06/2010, issued in process No. 03976/10, in www.dgsi.pt).
Likewise in another decision: "[t]hus, and first and foremost, credits must result from the normal activity of the company and it has been understood that credits resulting from the normal activity of the company are the debtor balances of clients and suppliers at the end of the fiscal year duly evidenced in appropriate accounts." (See Decision of the TCA-S of 03/12/2015, issued in process No. 01108/16, in www.dgsi.pt).
Normal activity is thus not only the act of realization or obtaining of income, it is not only the final phase of the process, in which there is contact with demand, but all acts tending toward the realization of the specific purpose of the entity, including the preparatory acts, or those situated upstream of the sale, i.e., the contacts with suppliers.
Supplier debts should, in this manner, equally be considered as resulting from the normal activity of taxpayers.
Article 28-A of the IRC Code makes no reference to the operational activity of the taxpayer, or even to clients, merely referring to "receivables" in its epigraph, and to "credits resulting from normal activity."
Indeed, it would be shocking if a client debt were considered an impairment, corresponding to the normal activity of the taxpayer, while a supplier debt for the acquisition of an asset indispensable to the downstream activity would not be.
On the other hand, and with respect to the second requirement (ii) (their collection is doubtful), the debtor, in the concrete case B…, had pending an insolvency proceeding, which, pursuant to Article 36 in force at the date of the facts (current Article 28-B, No. 1, subparagraph a) of the IRC Code, confirms that the credit was doubtful).
Finally, with respect to the third requirement (iii) (and are evidenced in the accounting as doubtful credits), the credit was evidenced as doubtful in the accounting.
As invoked by the Respondent (See Article 40 of the Response), the dependence of tax law on accounting law is only partial.
Thus, even if from an accounting point of view the exact classification of the advance might be discussed, what is at issue in the present case is the classification for IRC purposes.
In this sense, José Casalta Nabais sustains that "the taxable profit of companies is based on the accounting result, but is not confined to this, since fiscal profit also takes into account positive and negative patrimonial variations not reflected in the accounting result. Which means that, in the determination or calculation of the taxable profit of companies, the CIRC follows neither the model of total dependence, in which there would be coincidence of the accounting result with the fiscal result, nor the model of autonomy, in which taxable profit would be calculated in a manner totally autonomous from the accounting result. Rather, it adopts a model of partial dependence of tax law on accounting law. A non-coincidence that is well understood, since, while accounting profit is determined on the basis of principles, norms and rules of said accounting law and has as its users the users of the companies' financial statements (that is, investors, workers, financiers, commercial suppliers and other creditors, clients, the Government and its departments and the general public), fiscal profit is guided by the principles and norms of tax law and has as its addressee above all the State, more precisely the tax administration." (See José Casalta Nabais, Tax Law, Coimbra: Almedina, 2010, pp. 588 and 589).
In truth, it is generally purposes of combating tax evasion or irregular situations ("extra-system") that justify the non-deductibility of an expense, which does not appear to be at issue in the present case.
Thus, having regard to the foregoing, it seems, in fact, appropriate to classify the expense as an impairment.
That is, the requirements for the consideration of the expense as deductible as impairment seem to be met, fitting within Article 23, No. 2, subparagraph h) of the IRC Code.
ON INDEMNIFYING INTEREST
In addition to the foregoing, the Applicant also petitions for the reimbursement of the amount paid with indemnifying interest from the date of payment until the full reimbursement of said amount.
Pursuant to the provision of Article 24, No. 1, subparagraph b) of the RJAT, the arbitral decision on the merits of the claim for which no appeal or challenge is available binds the Tax and Customs Authority from the end of the period provided for appeal or challenge, and this must, in the exact terms of the success of the arbitral decision in favor of the taxpayer and until the end of the period provided for the voluntary execution of sentences of tax courts, "restore the situation that would have existed if the tax act which is the subject of the arbitral decision had not been carried out, adopting the acts and operations necessary for this purpose."
Consequently, and in accordance with Article 100 of the General Tax Code (LGT) applicable by virtue of Article 29, No. 1, subparagraph a) of the RJAT: "the tax administration is obliged, in case of total or partial success of a claim, judicial challenge or appeal in favor of the taxpayer, to the immediate and full restoration of the legality of the act or situation subject to the dispute, including the payment of indemnifying interest, if applicable, from the end of the period of execution of the decision."
Thus, and notwithstanding Article 2, No. 1, subparagraphs a) and b) of the RJAT use the expression "declaration of illegality" to define the material scope of competence of the arbitral tribunals, not making reference to condemnatory decisions, it should be understood that it comprises the powers which in judicial challenge proceedings are attributed to tax courts.
In fact, this is the interpretation which best accords with the purpose underlying the creation of arbitral tribunals in tax matters, i.e., that these would constitute an alternative means of dispute resolution and, consequently, alternative to judicial challenge proceedings and the action for the recognition of a right or legitimate interest in tax matters.
It should be noted that although the judicial challenge proceedings constitute a contentious matter of mere annulment of tax acts, condemnation of the Tax and Customs Authority to the payment of indemnifying interest is admissible, as prescribed in Article 43, No. 1 of the General Tax Code (LGT).
Pursuant to the article previously mentioned: "[i]ndemnifying interest is due when it is determined, in a gracious claim or judicial challenge, that there was error attributable to the services from which results payment of the tax debt in an amount exceeding what is legally due" (bold and underlined).
Moreover, it results from Article 24, No. 5 of the RJAT itself that "[i]t is due to the payment of interest, irrespective of its nature, pursuant to the terms provided in the general tax law and in the Code of Tax Procedure and Process."
In this sense, Councilor Jorge Lopes de Sousa refers that: "although the judicial challenge proceedings is essentially a proceeding of mere annulment (Articles 99 and 124 of the CPPT), condemnation of the Tax Administration to the payment of indemnifying interest and indemnification for undue guarantee can be rendered in it. In truth, although there is no express rule to that effect, it has been peacefully understood in the tax courts, since the entry into force of the codes of the fiscal reform of 1958-1965, that a petition for condemnation to payment of indemnifying interest can be joined in judicial challenge proceedings with the petition for annulment or declaration of nullity or non-existence of the act, since in those codes reference is made to the right to indemnifying interest arising when, in a gracious claim or judicial proceeding, the administration is convinced that there was a factual error attributable to the services.", adding that the same author "[…] particularly in proceedings which were pending in tax courts for more than two years and in which taxpayers used the right provided for in Article 30 of the RJAT, it would not be reasonable to understand that the arbitral tribunals could only examine the questions of the legality of the assessment acts challenged in the judicial challenge proceedings and not also the examination of the petitions for condemnation to indemnifying interest and indemnification for undue guarantee, which would result in the judicial challenge proceedings having to be kept, necessarily with suspension of the instance until the arbitral decision became final, only to examine these indemnifying petitions, whose examination depends on the decision regarding the legality of the assessment acts." (See Jorge Lopes de Sousa, Guide to Tax Arbitration – Commentary on the Legal Regime for Tax Arbitration, Coimbra: Almedina, 2017, pp. 95 and 97).
With regard to the scope of arbitral decisions, the arbitral tribunals operating in the CAAD have, repeatedly, condemned to the payment of indemnifying interest (in this sense and by way of example, Decision of the CAAD of 09/05/2017, issued in process No. 680/2016-T; Decision of the CAAD of 17/12/2014, issued in process No. 321/2014-T; Decision of the CAAD of 08/07/2013, issued in process No. 12/2013-T; Decision of the CAAD of 24/09/2012, issued in process No. 39/2012-T; Decision of the CAAD of 05/07/2012, issued in process No. 22/2012-T - in https://caad.org.pt/tributario/decisoes/).
The recognition of the right to indemnifying interest necessarily implies the existence of error attributable to the services "understood as the "error regarding the factual and legal presuppositions attributable to the Tax Administration" as is registered in the present case (See Decision of the CAAD of 28/08/2017, issued in process No. 30/2017-T, in https://caad.org.pt/tributario/decisoes/).
In the case at hand, following the illegality of the assessment act, there is place for reimbursement of the tax, by force of the aforementioned Articles 24, No. 1, subparagraph b) of the RJAT and 100 of the General Tax Code, since this is essential to "restore the situation that would have existed if the tax act which is the subject of the arbitral decision had not been carried out."
With respect to indemnifying interest, it is also clear that the illegality of the act is attributable to the Tax and Customs Authority, which, in erring in the legal classification to be followed, erred in the legal presuppositions.
Thus, the Applicant has the right to indemnifying interest calculated at the legal rate regarding the assessment that is being annulled, calculated from the date on which the payment of the respective tax was made.
C. DECISION
For these reasons, this Arbitral Tribunal decides to hold the arbitral petition presented as well-founded and, in consequence:
Annul the assessment act for Corporate Income Tax (IRC) No. 2016…, of 30 September 2016, relating to the fiscal year 2014, as well as the Statement of Accrual of Compensatory Interest No. 2016…, of 30 September 2016, and the consequent Statement of Account Adjustment, identified by No. 2016…, issued on 30 September 2016, from which results the amount of €33,805.80;
Condemn the Respondent to the payment of indemnifying interest due from the date of payment of the tax being annulled, until the full reimbursement of the amount paid.
D. VALUE OF THE CASE
The value of the case is fixed at €33,805.80, pursuant to Article 97-A, No. 1, subparagraph a), of the Code of Tax Procedure and Process (CPPT), applicable by force of subparagraphs a) and b) of No. 1 of Article 29 of the RJAT and No. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.
E. COSTS
The value of the arbitration fee is fixed at €1,836.00 pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, pursuant to Articles 12, No. 2, and 22, No. 4, both of the RJAT, and Article 4, No. 4, of said Regulation.
Notification is hereby ordered.
Lisbon, 19 January 2018
The Arbitrator
(Leonardo Marques dos Santos)
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