Unofficial English Translation
The arbitrators Cons. Jorge Lopes de Sousa (presiding
arbitrator), Dr. Martins Alfaro and Dr. João Marques Pinto (voting arbitrators),
appointed by the Deontological Council of the Administrative Arbitration Centre
to form the Arbitral Tribunal, constituted on 16-06-2021, agree as follows
A...,
S.A. , commercial company with head office at ..., ...-....
..., NIPC..., hereinafter referred to as "Applicant", came, under the provisions of Decree-Law No
10/2011 of 20 January (hereinafter "RJAT")to submit a request for an
arbitration award in order to declare null or at least annul the assessment of
corporate income tax for the period 2016, with number 2020..., of 04-11-2020, in
the amount of EUR 1,202,465.86 and respective statements of assessment of compensatory
interest and settlement of accounts.
The Claimant also requests the refund of the amount
paid with compensatory interest and compensation for undue guarantee.
The Respondent is the TAX AND CUSTOMS AUTHORITY (hereinafter also identified as "AT"
or simply "Administração Tributária").
The request for the constitution of the arbitral tribunal
was accepted by the President of CAAD and automatically notified to the AT on 06-04-2021.
Pursuant to the provisions of Articles 6(2)(a) and
11(1)(b) of the RJAT, as amended by Article 228 of Law No. 66-B/2012 of 31 December,
the Ethics Council appointed the signatories as arbitrators of the collective arbitral
tribunal and they communicated their acceptance of the position within the applicable
time limit.
On 25-05-2021, the parties were duly notified of the
appointment and did not express their wish to refuse the appointment of the
arbitrators, in accordance with the combined terms of paragraphs
a) e) of Article 11(1) of the
RJAT and Articles 6 and 7 of the Code of Ethics.
Therefore, in accordance with the provisions of
paragraph c) of no. 1 of article 11 of the RJAT, in the wording introduced by
article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral
tribunal was constituted on 16-06-2021.
The AT submitted an
answer, defending the unfoundedness of the request for arbitration.
On 25-10-2021 and 08-11-2021, meetings were held in
which witness evidence was taken and it was decided that the case would proceed
with simultaneous submissions.
The arbitral tribunal was duly constituted in
accordance with the provisions of Article 2(1)(e) and Article 10(1), both of the
RJAT and is competent.
The parties are duly represented, have legal
personality and capacity, and have legal standing (Articles 4 and 10(2) of the
same diploma and Article 1 of Ministerial Order 112- A/2011 of 22 March).
The proceedings are not flawed.
2.1. Proven facts
The following facts relevant
to the decision are deemed proven
A)
The Applicant is a public limited company belonging to
the economic group B...;
B)
The Applicant carries on the
business of "Manufacture of wire products and other miscellaneous metal
products";
C)
The organisation chart of the
Group's shareholdings is presented below:
D)
An inspection to the Claimant was carried
out under the Service Order OI2019..., in which the Tax Inspection Report (RIT)
was prepared, which is set out in document
no. 2 attached to the request for an arbitration award, the content of which is
hereby reproduced, in which it is stated, inter alia, as follows:
In addition to what has been said with regard to the general rule on the deductibility of expenses, enshrined in art. 23 of the CIRC, we must pay attention to the specificities of the code with regard to the limitations on the deductibility of expenses in general and the deductibility of financing costs in particular, since the legislator has introduced several rules to control them.
National Tax Law takes the accounting result as the general basis and the starting point of the taxable result, which is subject to corrections (art. 17 of the CIRC), according to the specific interests of taxation, which differ from those of accounting. This results from the model of partial dependence of taxation on accounting, already mentioned, which is characterised by the acceptance of the accounting treatment recommended in the accounting standards whenever its own tax rules are not established.
The general rule laid down in Article 23 of the CIRC is that only "expenses and losses incurred to obtain or guarantee income subject to IRC" are deductible. In other words, the rule requires a causal link between the expenses incurred and the income obtained in order to prevent the inclusion of expenses incurred in the pursuit of interests unrelated to the taxpayer himself. In addition, Article 23(2) specifically addresses sub-paragraph c) to expenses of a financial nature, which takes into account the destination given to the financing and restricts the deductibility of those expenses to those resulting from "borrowed capital applied in the operation", that is, to meet the expenses incurred by a company to ensure the exercise of its activity, which in the case of A... is the "Manufacture of wire derivative products and other miscellaneous metal products", as stated in the company's Commercial Registry Office Certificate. Therefore, only financing costs resulting from loans contracted to apply this activity will be accepted. namely in operating costs that give rise to outflows of monetary flows, such as wages, raw materials, energy, purchase of tangible fixed assets, etc.
An analysis of the company's balance sheet shows that external financing has a considerable weight in its liabilities, with financing obtained representing almost 80% of total liabilities, both at the end of 2015 and at the end of 2016, when the level of indebtedness is around 60%, as shown in the following table, resulting in high financing costs, which negatively influence the result for the period and whose analysis becomes pertinent, bearing in mind the applicable regulations.
(...)
The analysis of the company's balance sheet allows us to conclude that external financing has a considerable weight in its liabilities, with financing obtained representing almost 80% of total liabilities, both at the end of 2015 and the end of 2016, when the level of indebtedness is around 60%, as shown in the following table, resulting in high financing costs, which negatively influence the result for the period and whose analysis becomes pertinent, bearing in mind the applicable regulations.
Before moving on to the analysis itself, it is important to highlight that, as the indicators previously presented show, A... does not have a cash surplus situation, and the analysis of the financial movements shows that, to meet its obligations, the company has frequent recourse to credit.
In addition to the account "25 - Financing Obtained", the DO accounts themselves sometimes have negative balances, commonly known as bank overdrafts, which reinforces the dependence of the company on the use of borrowed capital to meet not only medium and long-term investments, but also to its current cash management. An example of this is the account "1227 - N...- Account 59S1303", whose monthly accounting balances are expressed in the following table, which was prepared from the SAFT-PT file provided by the taxpayer, and shows that throughout 2016 the account was recurrently negative.
Related to the aforementioned DO account is the account of loans obtained at N..., with the no...., which corresponds in the accounts to the account "25111108 - Financing Obtained - Credit in C/C-Assigned-N... "whose movements occurred in 2016 will be analysed in the following point.
- Account 25111108 - Financing Obtained - Credit on A/C - N.. Although this account shows a nil balance in the trial balance at 31/12/2016, it has a cumulative movement of €35,456,871.07 resulting mainly from the use of the account on 04/01/2016, in the amount of €30,500,000.00 and respective associated charges, which was intended to meet the negative balance in which the OD account at N... with the no. 5991303. which corresponds in the accounts to account "1227-N... - Account 5991003", referred to above, was in, which resulted from the movements described below.
On 04/01/2016A.bought foreign currency(GBP15,714,000+USD11514,000) which was applied, on the same date, to term deposits in currency
This gave rise to the accounting movements shown in the following table.
On the date of the foreign currency purchase, the current account in ... with no. 5991303 (1227) showed a positive bank balance of 30,000,149.55, as shown below (see bank statement in annex 4, folio 2);
With a posting date of 8/1/2016, but value date of 4/1/2016, i.e. the date of the aforementioned foreign exchange purchase, the account recorded an entry of 30,500,000.00, originating from the use of the current account with N..., with the number ..., which settled the bank overdraft caused by the purchase of pounds sterling (GBP) and US dollars (USD).
During the month of January various payments and receipts related to the company's activity were recorded in account 1227, which also had transfer movements to and from/to other accounts, mostly related to the use or settlement of bank credit, as noted in column 4 of the following table. As at 31/01/2016, it presented a negative balance, both in accounting terms and in its own bank (€503,707.46), a situation that remained practically unchanged throughout the year, as already mentioned.
In addition to the expenses inherent to the bank overdraft of the OD account, the credit contracted on 04/01/2016, recognised in account 25111108, whose first repayment, of €11,500,000.00, occurred only on 25/10/2016 (doe. 2-10100) generated monthly expenses, which are identified in the following table and assume the total amount of €356,871.05.
As described, the financing contracted on 04/01/2016, in the amount of 30,500,000.00 was used to make term deposits in foreign currencies. However, companies investing in term deposits is a management measure considered perfectly normal, insofar as these are characterised by being safe, very low-risk investment instruments, which allow some capital appreciation resulting from cash surpluses and are not expected to be needed in the short term. On the contrary, it is not envisaged that, under normal conditions, a non-financial company, as is the case of A..., resorts to bank credit, which generates high costs, to make bank deposits, considering that such situation goes absolutely beyond the normal activity of the company and can only be seen as an extraordinary and purely speculative negotiation.
In short, in the light of the above, and taking into account the deductibility rules set out in the CIRC, we conclude that the financing contracted on 04/01/2016, at the amount of 30,500,000.00, was not aimed at obtaining or guaranteeing income, an essential condition laid down in Article 23(1) of the CIRC, for the tax deductibility of expenses. Such conclusion derives from the normal rules of the banking system, which dictate that banks lend capital at rates much higher than those at which they remunerate bank deposits, so it is not clear how the operations described above, carried out by the taxpayer, were intended to pursue its interests in obtaining income.
Furthermore, as clearly demonstrated, the amount of €30,500,000.00 with which the company was financed on 04/01/2016 was not applied in expenses resulting from its operating activity, from which it follows that the expenses inherent to this account are also not deductible for purposes of determining the taxable income by virtue of sub-paragraph c) of no. 2 of article 23 of the CIRC.
In addition to the financial costs inherent to the account "25111108- Financing Obtained - Credit on current accounts - N... In addition to the financial costs inherent in the account "25111108- Financing Obtained - Credit on Demand - N...", associated with term deposits there is also the recognition of exchange rate differences, of a significant value, which will be analysed below.
- Exchange differences associated to time deposits A) Legal framework With regard to the accounting treatment of exchange differences, the provisions of NCRF 23 should be considered. Bearing in mind that the exchange rate differences under analysis herein result from the realisation of time deposits by A. in a currency different from its functional currency, which is the Euro, we are in the presence of "assets receivable in a fixed or determinable number of monetary units", i.e., monetary items, as results from paragraphs 7 and 15 of NCRF 23. In the treatment of exchange differences of monetary items, the provisions of paragraphs 19 to 32 of the standard must be taken into account, namely, that in preparing the financial statements an entity must translate foreign currency items into its functional currency and report the effects of such translation (§16 of NCRF
With regard to the initial recognition in the functional currency of foreign currency transactions, §20 of the standard states that they should be recorded "by applying to the foreign currency amount the exchange rate between the functional currency and the foreign currency at the date of the transaction".
On the settlement of monetary items, or their reporting at rates different from those initially recorded during the period or reported in previous financial statements, the corresponding exchange differences should be recognised in profit or loss in the period in which they arise, unless they arise on a monetary item that forms part of the entity's net investment in a foreign operation (paragraphs 26 and 30). Paragraph 27 goes on to state that if there is a difference between the exchange rate at which the monetary item was initially recorded and the exchange rate at the date of its settlement, that difference (positive or negative) should be recognised in profit or loss for the period of that settlement. Thus, "When the transaction is settled within the same accounting period in which it occurred, the entire exchange difference is recognised in that period. However, when the transaction is settled in a subsequent accounting period, the exchange difference recognised in each period up to the settlement date would be determined by the change in exchange rates during each period."
Subsequently, as stated in paragraph a) of §22 of NCRF 23, at each balance sheet date, "monetary items in foreign currency should be translated at the closing rate", and the respective exchange difference is recognised in the income statement for the corresponding period. In practice, this procedure means remeasuring the final balance of monetary items in foreign currency at the balance sheet date (31/12), taking into account the closing exchange rate on that day (31/12) between the foreign currency in question & the euro, recognising the exchange difference in the results for the period.
With regard to exchange rates, defined as the exchange ratio of two currencies (§7, NCRF 23), the official exchange rates published by the Banco de Portugal (BdP) are commonly used, available at https://www.bportugal. pt/taxas-cambio, page where it is possible to download information on exchange rates since January 1999 in "xlsx file" or "csv file". As a rule, exchange rates are published "as is", indicating how much a unit of national currency is worth in foreign currency, and are usually represented by the symbol of the base currency followed by the symbol of the second currency. For example, EUR/USD represents the price, in American dollars, of each euro, so if the EUR/USD exchange rate is 1.0541, it means that, to buy 1 euro it takes 1.0541 dollars:
Amount to be recognised in the accounts = Amount of foreign currency / exchange rate
In tax terms, the CIRC does not contemplate any specific regime with regard to the matter in question, which is equivalent to saying that, with the model of partial dependence of taxation on accounting in force, the accounting treatment set out above is accepted. Therefore, it should be noted that
- Favourable exchange differences duly
recognised are considered income for the purposes of determining taxable profit
in accordance with paragraph c) of no. 1 of art. 20 of the CIRC, which states that
"Income and gains are considered to be those resulting from operations of any
nature, as a consequence of a normal or occasional, basic or merely accessory
action, namely
c) Of a financial nature, such as interest, dividends, discounts, goodwill, transfers, exchange rate differences, bond issue premiums and those resulting from the application of the effective interest method to financial instruments valued at amortized cost"; (emphasis added)
- Unfavourable exchange differences duly recognised are considered as expenses for the purposes of determining taxable profit in accordance with paragraphs c) of nos. 1 and 2 of art. 23 of the CIRO, which states that "For the purposes of determining taxable profit, all costs and losses are deductible incurred or borne by the taxpayer to obtain or guarantee income subject to IRC", namely those:
"c) Of a financial nature, such as interest on borrowed capital applied in the operation, discounts, goodwill, transfers, exchange differences, expenses with credit operations, debt collection and issue of bonds and other securities, reimbursement premiums and those resulting from the application of the effective interest method to financial instruments valued at amortised cost;" (emphasis added)
Logically, with regard to exchange rate differences originating expenses, in order for them to be accepted, all the requirements set out in the CIRC for the deductibility of expenses and to which we have already referred, namely, being essential to obtain or guarantee income subject to IRC and the appropriate documentary support, must be met. It should also be noted that since "exchange differences constitute components of the valuation of items on the balance sheet or income statement (...) In terms of IRC, it should be noted that "exchange differences constitute components of the valuation of items on the balance sheet or income statement (...).) In terms of IRC, in general terms, the treatment of exchange differences should take into account the framework of the corresponding item", so that "if a given expense is not deductible for purposes of determining the taxable income, then the corresponding exchange variations, as components of the respective value, should also be subject to the same limitations applicable to the expenses to which they correspond", as clarified in the binding information, proceeding no. 2017 001652, with Order of the Deputy Director-General of 19/07/2017.
B) Exchange differences recognised in the accounts
As can be seen from an analysis of the company balance sheet, costs with exchange rate differences totalling EUR 5,217,507.84 and income of identical nature in the amount of EUR 1,306,279.58 were recognised, as better detailed in the following table.
The balance of the account "78613- Gains and Income from other assets- Favourable exchange differences-Relative to bank deposits in Foreign Currency" is negatively influenced by an accumulated debit of 663,591.36, which resulted from the accounting entry related to internal document no. 12134 of journal 2, as shown in the following image, extracted from the SAFT- PT file, and, given the nature of the movement, indicates that it relates to an unfavourable exchange rate difference, and therefore liable to be recognised in account 6863 and not as a debit to an income account.
In view of the above, the costs arising from exchange rate differences recognised in the accounts amount to €5,881,099.20 (€5,217,507.84 + €663,591.36), and of these, they arose from the valuation of term deposits, designated in the piano of accounts as "investment activities", as opposed to "operating activities", costs of €4,527,887.73 (€3,864,296.37 + €663,591.36).
As in the Q07 of the Modelo 22 no correction inherent to the exchange ratedifferences was identified, this is equivalent to saying that they contributed to the determination of the taxable income, for which reason they will be analysed, always bearing in mind that they derive from the valuation of assets (term deposits) and their tax framework should take this reality into account, namely if the constitution of such deposits is determinant for the taxpayer "to obtain or guarantee income subject to IRC" (no. 1 of article 23 of the IRCRC). This is because, as already mentioned, the framework of exchange differences should take into account the framework of the item to which they correspond.
As mentioned, on 04/01/2016, A... made a term deposit in GBP,
which was debited to account 13217. The following table shows the exchange rates
of the euro against pounds, on different dates, which shows a depreciation of
the euro against this foreign currency, between the beginning and end of 2016.
By setting up the term deposit of GBP 15,720,475.00, account 13217 was debited (doe. 2-1003) for EUR 21,336,183.69, which resulted from the conversion of pounds at the exchange rate inherent in the balance of account 12927. on the same date, as shown in the following table.
The said deposit was settled on 01/04/2016, which gave rise to the accounting movement (doe. 2-4009) expressed in the following table.
Throughout the year deposits were made on the following dates on a quarterly basis, with all entries relating to the settlement of deposits duly using the exchange rate of the Bank of Portugal on the date of the operation to recognise interest and the corresponding tax:
-On 06/04/2016 a bank deposit of GBP15,727,582.00 (GBP15,720,475.00 + interest from 01/04/2016) was set up and matured on 06/07/2016;
- On 08/07/2016 they constituted a further deposit of GBP15,720 475.00, which was settled on 11/10/2016;
- On 19/10/2016 a term deposit of GBP15,728,147,40 (GBP15,720,475,00 +
interest from 08/07/2016) was set up and matured on 30/12/2016.
With the exception of the accounting entry resulting from document no. 4009 of journal 2, no further exchange differences inherent to the aforementioned time deposits were recognised during the year. Analysis of the bank statements shows that the foreign currency (GBP) acquired on 04/01/2016 remained in bank accounts denominated in GBP, either in the current account no. ... in GBP s/o N..., and invested in term deposits in the same bank, so, the financial position of the company never changed, hence, the recognition of the negative exchange difference of € 79,946.96 on 01/04/2016 does not make sense.
In addition to the entries of pounds in account 12927 arising from the deposit due on 30/12/2016 (doe. 2-12122) the account recorded other entries in the month of December 2016. The following table expresses all movements that occurred in the account in the last month of the year, which reached, on 30/12/2016, a balance of GBP 20,795,777.61.
On 30/12/2016, A... sold GBP20,780,000.00, at an exchange rate of 0.854, equivalent to €24,332,552.69 (GBP20,780,000.00/0.854), having carried out the accounting movement shown in the following table, which reflects the recognition of exchange rate expenses in the amount of €2.876,542.67, which resulted from the fact that the taxpayer used an exchange rate EUR/GBP 0.76372, to exit the pounds from account 12927, which is similar to the date of entry of the pounds on 04/01/2016 (0.7368).
In fact, as foreign currency entered the bank accounts on 04/01/2016 at a EUR/GBP exchange rate of 0.7368, which was only transferred to the euro sight deposits account on 30/12/2016 at a EUR/GBP exchange rate of 0.854, it is on this date that there is an effective exchange loss, caused by the devaluation of the euro against the pound sterling, which was accounted for in the movement expressed above.
On the date on which the amount of €24,332,552.69 entered the account 1227, i.e. 30/12/2016, the amount of €23,700,000.00 left the same account, as reflected in the following figure, extracted from the SAFT-PT movement lines.
The credits in account 1227 shown in the previous figure were used to repay bank loans, as shown below:
- The amount of €21,700,000.00 (doe.
2-12127 and 2-12128) has been debited to account 25111108, which has been settled.
The bank statement attached as annex 5 (6 sheets) shows that the loan contracted
on 04/01/2016 was settled on this date;
-The sum of 1,000,000.00 Euros credited by doe. 2-12129 entered the current account 1231 and was withdrawn on the same date (doe. 2-12165) to repay the loan shown in account 25111107;
-The amount of 1,000,000.00 Euros credited by doe, 2-12130 entered the current account 1279 and was withdrawn on the same date (doe. 2-12138) to repay the loan reflected on account 25111106.
In short,
Despite not having cash surpluses, frequently resorting to credit to meet its medium and long-term obligations, as well as those of current management, which exposes the company to high levels of indebtedness, A... invested in term deposits in foreign currency, which further aggravated its dependence on bank credit. Such investment generated financial expenses which, although they contributed negatively to the determination of the taxable income of the taxpayer, not only were not aimed at the pursuit of its interests, as they do not arise from loans taken out to invest in the company's business, which the company would not have needed to borrow if it had not invested in foreign currency.
Since time deposits are absolutely abnormal and speculative in nature, negative exchange rate differences relating to their valuation, as components of their value, are not deductible for purposes of determining taxable income, and therefore an amount of €2,956,489.63 (€79,946.96 + €2,876,542.67) should have been added to the net income for 2016.
(...)
Focusing on the legal framework of the issue in question, as far as PT isconcerned, Portuguese tax legislation follows the recommendations of the Organisation for Economic Cooperation and Development (OECD) and applies to most taxpayers that record linked transactions, i.e. transactions carried out between related entities. Generally speaking, PT can be defined as the value attributed to internal transactions between several companies belonging to the same economic group.
In this regard, article 63 of the CIRC and Port. 1446-C/2001 of 21/12, which establish that the prices to be adopted in related transactions should be those that would be established if the entities involved were acting under arm's length conditions, should be taken into account, with the aim of ensuring that tax revenues are not reduced as a result of the transfer of results between entities belonging to the same group or related in a given context. In other words, ensuring that the PTs adopted are those that would be established under market conditions, in alignment with the arm's length principle.
The application of the arm's length principle is required for all transactions irrespective of whether they are subject to income tax or not.
The application of the referred principle should be based on the comparison of prices or margins used in related operations, with the prices or margins practiced in similar operations carried out between non related entities (independent entities) through the adoption of the method considered to be the most appropriate, establishing the indicators to be taken into account for the choice of the referred method.
Whenever the rules set out in no. 1 of article 63 of the CIRC are not observed, adjustments must be made, as set out in nos. 8 to 12 of the same precept. In relation to transactions with non-resident entities, paragraph 8 provides that "the taxpayer must make, in the declaration referred to in article 120, the necessary positive corrections to the determination of the taxable income, for the amount corresponding to the tax effects attributable to such non-compliance".
When the tax authorities "make corrections necessary for the determination of the taxable profit due to special relations with another taxpayer subject to IRC or IRS, in the determination of the taxable profit of the latter, the appropriate adjustments reflecting the corrections made in the determination of the taxable profit of the former shall be made" (Article 63(11) of the CIRC).(no. 11 of art. 63 of the CIRC), and may "also make the correlative adjustment referred to in the previous number when this results from international conventions entered into by Portugal and under the terms and conditions provided for therein", as established in no. 12 of art. 63 of the CIRC. In turn, Article 3 of Ministerial Decree no. 1446-C/2001, of 21/12, states that
"1 - Whenever the terms and conditions of a linked transaction involving a taxpayer and a non-resident entity in Portuguese territory differ from those which would normally be agreed, accepted or practised between independent entities, the latter must make a positive correction corresponding to the tax effects attributable to that deviation, so that the taxable profit determined is no different from that which would be determined in the absence of special relations.
2 - When the terms and conditions of a linked transaction involving a taxpayer and an entity resident in Portuguese territory differ from those that would normally be agreed, accepted or practised between independent entities, the Directorate-General for Taxation may make the corrections to the taxable profit that are necessary so that the respective amount corresponds to that which would have been obtained if the transaction had taken place in a normal market situation. (emphasis added)
From the above, it is easy to conclude that there are two types of procedures to make the adjustments, depending on the tax residence of the intervenients in the linked transactions. Thus, we have:
- In related operations with
non-resident entities in Portuguese territory (no. 8 of article 63 of the CCCR
and no. 1 of article 3 of Por. 1446-C/2001, of 21/12), the taxpayer must make a
positive correction in the calculation of the taxable profit, in the model 22
income declaration, corresponding to the tax effects attributable to the deviations,
with no provision for making negative corrections;
- In related operations with entities
residing in Portuguese territory (no. 2 of art. 3 of Ministerial Order
1446-C/2001, of 21/12), it is solely the State's responsibility to assess the
need to make adjustments, so that the AT can make the corrections to the taxable
profit that are necessary for the respective amount to correspond to what would
have been obtained if the operation had taken place in a normal market
situation.
As far as the departures are concerned, it should be noted that in respect of resident entities, automatic adjustments are foreseen (no. 11 of art. 63 of the CIRC). In the case of non-residents, the taxpayer should request a review of their tax situation, as provided for in Article 18 of Ministerial Order 1446-C/2001 of 21/12, paragraph 1 of which states that "For the purposes of the adjustment provided for in Article
In the case of a request for revision of the tax situation of a taxpayer based on corrections made, or an official proposal to make, by a competent foreign tax authority to the taxable income of related entities, which results, or will result, in double taxation not in accordance with the rules of an international treaty signed by Portugal.
The adjustments due must be made in the period in which the operations that gave rise to them occurred, as mentioned in no. 10 of art. 63 of the CIRC and art. 21 of Port. 1446-C/2001, of 21/12.
In order to justify that the terms and conditions of the operations carried out between entities with special relations are established in compliance with the arm's length principle, Article 63(6) of the CIRC provides that "The taxpayer must keep organized, in the terms established for the tax documentation file referred to in article 130 of the CIRC, the documentation relating to the policy adopted on transfer pricing, including the guidelines or instructions relating to its application, the contracts and other legal acts entered into with entities with which it is in a situation of special relations, with the modifications of the transfer pricing policy and of the legal acts in force.The documentation relating to the adopted policy in terms of transfer pricing, including the guidelines or instructions relating to its application, the contracts and other legal acts entered into with entities with which it is in a situation of special relations, with the modifications that occur and with information about the respective fulfilment, the documentation and information relating to those entities and to the companies and goods or services used as a term of comparison, functional and financial analyses and sector data, and other information and elements which it took into consideration for the determination of the terms and conditions normally agreed, accepted or practised between independent entities and for the selection of the method or methods used". Taxpayers must therefore prepare and keep up-to-date a PT Dossier (DPT), which must contain the information set out in no. 6 of art. 63 of the CIRC and information provided in no. 14 of Ministerial Decree 1446-C/2001 of 21/12. It is also referred in nr. 1 of art. 13 of Port. 1446-C/2001, of 21/12, that the DPT must contain "information and documentation concerning the policy adopted in the apt to prove
a)
The
market parity in the terms and conditions agreed, accepted and practiced in the
transactions carried out with related entities;
b)
The
selection and use of the most appropriate method or methods for determining
transfer prices that provide a closer approximation to the terms and conditions
practiced by independent entities and that ensure the highest degree of comparability
of the transactions or series of transactions carried out with other
substantially identical transactions carried out by independent entities in a normal
market situation".
Article 14 of Ministerial Dispatch 1446-C/2001, of 21/12, lists the information considered relevant for the preparation of the DPT, based on the documentation described in Article 15 of the same diploma. Thus, the DPT must contain the following
"a) Description and characterization of the situation of special relations in accordance with the provisions of no. 4 of article 58 of the IRC Code applicable to entities with which it carries out commercial, financial or other operations, as well as the evolution of the corporate relationship of the link that constitutes the origin of the special relation, including, if applicable, the subordination contract, parity group or other of equivalent effect, or, has thus, elements demonstrating the situation of dependence referred to in subparagraph
(g) of paragraph 4 of that Article;
b)
A
description of the activity carried out by the taxpayer and the related entities
with which he carries out transactions and, in relation to each of these, a
detailed indication, by nature of the transactions, of the amounts of those transactions
recorded by the taxpayer in the last three years, or the period in which they took
place, if shorter, as well as, in justified cases, the availability of the
social accounts of those entities;
c)
Detailed
identification of the goods, rights or services that are the object of the tied
transactions, and of the terms and conditions established, when this information
does not result from the contracts celebrated;
d)
Description
of the functions performed, assets used and risks assumed by both the taxpayer
and related entities involved in the linked transactions; e)Technical studies focusing
on essential areas of the business, namely investment, financing, research and
development, market and restructuring and reorganisation
of activities, as well as forecasts and budgets concerning the global activity
and the activity by division or product;
f)Guidelines on the application of the adopted transfer pricing policy, whatever form or name is given to them, containing instructions in particular on the methodologies to be used, the procedures for gathering information, especially internal and external comparable data, the analyses to be carried out in order to evaluate dag) Contracts and other legal acts practiced both with related entities and independent entities, with the modifications that may occur and with historical information on the respective fulfilment; the following elements must also be provided, when not expressly included in the existing legal instruments or when the practice followed diverges from that agreed therein
1) Definition of the scope of intervention of the parties
involved:
2)
Product
delivery conditions and ancillary activities involved, namely after- sales services,
technical assistance and guarantees:
3)
Price
and, if necessary, the respective calculation method, and also, if it is associated
to assumptions, the indication of these assumptions and the circumstances under
which they are subject to revision, as well as a breakdown of the respective
rules and a detailed explanation of the multiannual price adjustments, pointing
out, namely, the quantitative effects arising from factors linked to economic cycles;
4)
Agreed or envisaged
duration and permitted termination modalities;
5)
Penalties
and the respective calculation procedure for late performance or non-compliance,
whatever their form of manifestation, including in particular interest for late
payment;
h)
Explanation
on the application of the method or methods adopted for the determination of
the arm's length price in relation to each transaction and indication of the
reasons justifying the selection of the method considered most appropriate;
i)
Information
on the comparable data used, highlighting, in the event of recourse to an external
entity specialised in market research, the justification
of the selection, in the cases where this is justified, the technical file of
the studies, as well as a sensitivity and statistical security analysis or, if
the source of the data is internal, the respective technical file;
j)
Details
of the analyses performed to assess the comparability between related and
unrelated transactions and between the companies involved in them, including functional
and financial analyses, and any adjustments made to eliminate existing
differences;
l)
Business
strategies and policies, including risk, that may influence transfer pricing or
the allocation of profits or losses from operations;
m)
Any
other information, data or documents deemed relevant for the determination of the
arm's length price, the comparability of the transactions or the adjustments
made."
The obligation to prepare the file with all the information underlying PT only applies to companies that have reached an annual value of net sales and other income exceeding Euro 3,000,000.00 (number 3 of article 13 of Ministerial Order 1446-C/2001, of 21/12), being determined by number 7 of article 63 of CIRC that "The taxable person must indicate in the annual declaration of accounting and tax information referred to in article 121, the existence or inexistence of during the tax period in question, as the case may be, of a taxable amount of Euro 3,000,000.00".In the annual tax and accounting information return referred to in Article 121, the taxpayer must indicate the existence or non-existence, during the tax period to which it relates, of operations with entities with which it is in a operations, must also declare their existence:
a)
Identify the entities
concerned;
b)
Identify and declare
the amount of the operations carried out with each one;
c)
State
whether it has organised, at the time the
transactions took place, and maintains, the documentation relating to the transfer
prices practiced."
Regarding the transactions with related entities resident in the national territory, the information referred to above must be included in Table 10 of Annex A of the IES. For transactions with non-resident related entities, this information must be included in Box 3 of Annex H of the same declaration. The following image shows the information on transactions with related entities that the taxpayer has declared in the IES, noting that only the information on transactions with related entities resident in Portugal has been included and that Annex H has not been submitted.
From the above legal framework, we conclude that as regards the burden of proof in the application of the rules on PT, the taxable person has the burden of proving that the operations it carries out with related entities respect the arm's length principle.
With regard to A..., specifically, it was found that it carried out, in 2016, transactions with related parties, and it was requested, in point
2)
of
the request for information made on 07/02/2020, the "Transfer pricing
file". The analysis that follows will focus on the TPD submitted by the
taxpayer in the course of the inspection procedure, which is attached as Annex 6
(24 sheets).
-
DPT Analysis submitted
by the taxable person
The document presented consists of twenty-four pages, of which the first, which is the cover page of the DPT, identifies and justifies the method used in the comparison of bound and non-bound operations, where it is stated that "In order to respect the principle of full competition and tax parity, the Comparable Market Price Method was chosen (art. 6 of Ministerial Order 1446-C/2001 of 21/12) as it is considered that this method allows the highest degree of comparability to be obtained,".
On the page following the cover page, the related entities are identified, where it is stated that "H... is 100% owned by A... and O... is considered a related entity by alinea d) no. 4 art. 63. As well as L... and K...". On the following page a table is displayed with the amount of sales volume made with the non-resident related entities, i.e. the L... UK (L...UK) and K... (K...France).
The taxpayer's DPT includes 19 pages named "Transfer Price List", where the "Average selling prices" of a family of products, practiced with each one of the related entities, and the "Average selling prices" of the same family practiced with other 9 companies, referred to by the taxpayer as "Non-associated companies", are displayed. To better reflect what has just been described, please see the following image, which is an example of one of these pages, relative to the "Electrowelded mesh" family and related entity "K... SARL".
The remaining two pages refer to the "Summary Analysis of Annual Sales regarding L...UK and K...France, where the taxable person presents the quantities (Kgs) sold monthly, to those entities, and the respective value in Euros.
However, it can easily be concluded from the above that the DPT presented to us does not contain the information legally required by paragraph 6 of art. 63 of the CIRC and articles 13 and 14 of Ministerial Order 1446-C/2001 of 21/12, already mentioned above. In fact, the analysis of any specific operation is not carried out, the method of selection of the unrelated entities is not explained, nor is the method of calculation of the "PMV" included in the "List of transfer prices". Furthermore, the documents mentioned in the legislation were not attached, namely the financial statements of the related entities and the contracts and agreements in force with them, as well as technical studies, functional and financial analyses and guidelines on PT policies adopted.
Despite the limitations of the document presented, we will proceed to the analysis of the operations with related entities practiced by A..., based on the data contained in the SAFT of the invoicing, made available by it during the inspection procedure.
In the 2016 period the related operations represent about 15% of the total turnover and are distributed among the related entities as follows:
As previously mentioned, for linked transactions between resident entities, no adjustments by the taxpayer are foreseen, that is, the possible adjustments depend on the intervention of the AT, and the adjustment to be made in the determination of the taxable income of a taxpayer is reflected, in the opposite direction, in another taxpayer, it being up to the state to consider the effects of any correction. The AT may consider it necessary to make the correction if it concludes that the tax results different from that expected if the operations had been carried out between independent entities. In this case, regarding resident entities, H... and O..., as both companies have positive results subject to the same taxation regime as the taxpayer under analysis, the effect of tax collection by the State is neutral, so it is not relevant to develop the analysis regarding the transactions carried out with these entities.
As to non-resident entities in Portuguese territory, in case the terms and conditions of a linked transaction differ from those that would be normal between independent entities, the taxpayer should make the positive corrections in the computation of the taxable profit in the tax return model 22, under penalty of the AT making the due corrections. When a double tax treaty (DTC) exists, in respect of adjustments made by the AT, Article 63(12) of the CIRC (now Article 63(14)) states that "The Directorate-General of Taxes may also make the correlative adjustment referred to in paragraph 1 above when this results from international conventions entered into by Portugal and under the terms and conditions provided for therein". In this respect, the DTTs between Portugal and France and between Portugal and England, approved by Decree-Law 48497 of 27/03/1968 and Decree-Law 105/71 of 26/03 respectively, incorporate in their article 9 the arm's length principle, providing that, "When:
a)
An
enterprise of a Contracting State participates, directly or indirectly, in the
direction, control or capital of an enterprise of the other Contracting State, or
b) the same persons participate, directly or indirectly, in the direction, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State and, in both cases, the two enterprises, in their commercial or financial relations, are linked by accepted or imposed conditions which differ from those which would be established between independent enterprises, profits which, had those conditions not existed, would have been made by one of the enterprises, but were not so made because of those conditions, may be included in the profits of that enterprise and consequently taxed." It follows from that article that States must make the correlative adjustment that results from the correction made in other States. In other words, if a company has seen its tax results increased in Portugal due to a correction originated by the failure to comply with the arm's length principle in operations carried out with a related entity taxed in another state, it is entitled to see the tax result subject to taxation there decreased by an equal amount. However, these adjustments are not automatic and it is up to the taxpayer, if he so wishes, to request a review of his tax situation as provided for in art. 18 of Port. 1446/C/2001, of 21/12,
In view of the above, we will focus our analysis only on transactions with non- resident entities, i.e. sales to K...France and L...UK, starting by analysing the comparables indicated by the taxpayer in the DPT provided to us.
- Analysis of the comparables used by A...
As already mentioned, in the DPT pages regarding the "Transfer Price List", the taxpayer indicates the "PMV" of a family of products, practiced with each one of the related entities, and the "PMV of the same family practiced with other 9 companies, designated by the taxpayer as "Non related companies", so we will proceed to the analysis of those values for the two non resident related entities.
In the period under review K...France only purchased from the taxable person products of the "electrowelded mesh" family, for a total amount of €5,041,166.11, the taxable person having indicated a VMP for the related entity of €0.45.
The following table analyses the invoicing data relating to K...France and the "Non-associated companies" indicated by the taxpayer in the "Transfer Pricing List" included in the DPT submitted to us (see figure 2), which made it possible to determine the PMV practiced with these entities (column 6) and to compare it with the PMV entered by A... in the DPT.
It should first be noted that, according to the invoices included in the SAFT of the invoicing for 2016, 166 product codes were identified in the product family "Welded mesh", for which the selling price per square meter presented a wide range, varying between €0.3284 per m2, for the product with code 0370305000, and €7.62 per m2, for the product with code 0390100603, so that using a VMP determined under these conditions cannot be considered the best comparable. Moreover, comparing the figures in columns (6) and (7), it is easy to see that the VMPs indicated by the taxable person are not confirmed by the invoicing data and it is not possible to check their origin.
As for the "Non-associated companies" used as comparators, there are several inconsistencies. Firstly, a company to which no sales of the product family in question were made was included, a company with which there are special relations was included, as G... is majority owned by A..., customers operating in very different markets were included and, not even the data of the main customers of this family of products was used, which are presented in the following table, based on SAFT invoicing data.
As regards L...UK, it was sold products of various families, which are shown in the following table. Again, by comparing the figures in columns (5) and (6), it can be seen that the VMPs indicated by the taxable person are not confirmed by the invoicing data.
Once again, the criterion for the selection of the entities with which the comparison is made is not the most appropriate. The taxable person has again selected, for comparison purposes, companies without any commercial transaction of the product family in question and related companies. See, by way of example, the following image concerning the 'Electrowelded mesh' product family sold to L...UK, which illustrates the two situations just described.
Since the DPT submitted by the taxable person does not have any information on the comparable data used, nor any details on the analysis performed to assess the degree of comparability between tied transactions and transactions between the companies involved in them, it is concluded that, although everything indicates that internal comparables were used, the LMPs included in the PT listings do not result from the invoicing issued to their customers in 2016. Regarding the criteria and parameters used to obtain the final list of the nine companies that make up the sample of best comparables, it is clear that they were not correctly applied.
In short,
The comparables used by the taxpayer to justify the compliance of related transactions with the arm's length principle do not meet the requirements imposed by the CIRC and Port. 1446-C/2001, of 21/12, thus not providing the highest degree of comparability between related and unrelated transactions.
Consequently, there was a violation of the arm's length principle in the sales made to related entities, and no adjustments were made for purposes of determining the taxable income. Without calling into question the method used by the taxpayer, that is, the comparable market price method (MPCM), provided for in article 63(3) of the CIRC and in articles 4 to 10 of Ministerial Order 1446/C/2001, of 21/12, nor the use of internal comparables, we will proceed to identify comparable transactions by resorting to A... invoicing data of 2016.
-
Justification of the conditions for the determination of internal comparables In accordance with paragraph 3 of
art. 77 of the LGT, whenever there is non- compliance with any obligation laid
down in law, the determination of the taxable income corrected for the effects
of special relations shall comply with the following requirements:
"(a) Description of special relations;
b)
Indication of the
obligations with which the taxable person has failed to comply;
c)
Application
of the methods provided for by law, with the Directorate- General for Taxation
being able to use any elements at its disposal and its duty to substantiate the
elements of comparison being considered to be adequately
It is also observed that those elements should be purged of data likely to identify the entities to which they relate;
d)
Quantification of
the respective effects".
In accordance with our duty to state reasons, we will now examine each of the above requirements.
a) Description of the special relations
It is an essential assumption to the application of the PT regime the existence of special relations between the parties that, once verified, will be qualified as related parties. The concept of special relations is foreseen in article 9 of the OECD Model Tax Convention and in article 63(4) of the CCCR, according to which, "Special relations between two entities are deemed to exist in situations where one has the power, directly or indirectly, to exercise a significant influence over the management decisions of the other, which is deemed to exist, notably, between:
a)
an
entity and the holders of its capital, or their spouses, ascendants or descendants,
who have, directly or indirectly, a holding of not less than 20% of the capital
or of the voting rights;
d) Entities in which the majority of the members of the corporate bodies, or of the members of any administrative, direction, management or supervisory bodies are the same persons or, if different, are linked to each other by marriage, legally recognized de facto union or kinship in direct line;
As per the organization chart of the participations of Group B... already presented in figure 1, it was concluded that A... has special relations with the following entities:O..., H..., L...UK and K...France. Moreover, this is also the understanding of the taxpayer when mentioning in the DPT that "H... is 100% owned by A... and O... is considered a related entity by alias d) n.º4 art.63, as well as L... UK and K...",
As the aforementioned entities are in a situation of special relations, the commercial transactions carried out with them should have been contracted, accepted and practiced with terms and conditions substantially identical to those contracted, accepted and practiced between independent entities, in comparable circumstances, in obedience to the principle of full competition set out in no. 1 of article 63 of the CIRC.
b)
Indication of the obligations with
which the taxable person has failed to comply As it follows from the above, the TOR
exhibited by the company does not meet the legal requirements, not showing any care
by the taxpayer in the justification of its TTP policy in order to demonstrate the
respective compliance of the prices practiced in the tied transactions with the
arm's length principle.
In order to achieve the highest degree of comparability between tied and untied operations, as imposed by PT policy, it is necessary that the economic characteristics of the operations considered are sufficiently comparable. Portuguese law, specifically paragraph 3 of article 4 of Ministerial Order 1446- CÍ2001, of 21/12, explains and sets out the conditions required for comparability between transactions to be verified. The legislator states that transactions are only considered comparable if they are "substantially identical", that is, if the main economic and financial characteristics are "similar or sufficiently similar" so that the differences, if any, cannot significantly influence the terms and conditions that would be obtained in the case of transactions carried out between independent entities. Art. 5 of the referred Ministerial Order lists several comparability factors, in which the specific characteristics of the goods object of the transaction constitute the first factor taken into consideration. It is well understood that this is so, since the similarity of the products manufactured implies a strong similarity of assets, functions, risks, surplus obtained and profitability of the activity.
The comparables used by A... do not square with the requirements imposed by the PT regime, presenting several non-conformities, namely the following
- Despite having all the internal data that would allow it to determine the PMV for each type of product transacted, the taxpayer opted to use comparable by 'Product Family', which includes a wide variety of products with very disparate prices, as is the example, already presented before, of the "Electrowelded mesh" with 166 product codes, and sales prices varying between €0.324 and €7.6;
-As demonstrated in the previous analysis of the comparables used by A..., the VMPs indicated by it in the PT listings, in a generic manner, without any explanation of the calculations made, do not correspond to those effectively practiced with the related entities, nor with the "associated companies";
- The nine companies included in each
PT listing, for the purposes of comparison with the related entity, do not
reveal themselves at all as the best comparables,since
entities with which A.. has special relations are included and not only
independent entities and companies for which no sales of the family of products
in question were made (see examples presented in figures 2 and 3);
- Also with regard to the selection
of comparable entities, companies operating in different geographical markets were
included, for which the taxpayer invoices in a different currency from the
invoicing to the related entity, which for L..., UK is GBP and for K...France is
the Euro, with the implications arising from that fact as regards exchange rate
differences.
However, once again it is stressed that the comparables presented in the DPT are unreliable, not allowing the degree of comparability between tied and untied transactions required by the arm's length principle.
With regard to this requirement, the method indicated by the taxpayer to determine transfer prices in accordance with the arm's length principle was the MPCM, a methodology that will also be adopted by us in the analysis of the company's operations and is set out in Article 6 of Ministerial Order 1446-C/2001, of 21/12, which stipulates
"1 - The adoption of the comparable market price method requires the highest degree of comparability with incidence both on the object and other terms and conditions of the operation and on the functional analysis of the intervening entities. 2 - This method may be used, namely, in the following situations:
a)
Where
the taxable person or an entity belonging to the same group enters into a
transaction of the same nature for an identical or similar service or product,
in like quantity or value, and on substantially identical terms and conditions,
with an independent entity in the same or similar markets;
b)
When
an independent entity carries out a transaction of the same nature having as
its object an identical or similar service or product, in like quantity or
value, and on substantially identical terms and conditions, in the same or similar
markets.
3-Whenever a linked transaction or a non-linked transaction are not substantially comparable, the taxpayer shall identify and quantify the effects caused by existing transfer pricing differences, which shall be of a secondary nature, and make the necessary adjustments to eliminate them in order to determine an adjusted price corresponding to that of the comparable non- linked transaction.
The MPCM consists of comparing the price charged in related transactions with the price charged in unrelated transactions, provided those transactions are substantially the same. This method is mainly applied in cases where related entities provide the same service or sell the same product which is traded between independent entities, in the same or similar markets.
Based on the above requirements for the applicability of MPCM, we will determine the VMP for each product code sold to related companies and compare it with the VMP practiced with independent entities. To this end, the selection of independent entities operating in the same geographic market and the comparison of the MPV for the same product code were considered as essential comparability factors, and the methodology described below was followed:
1)
All
sales made to the related entities L... UK and K... France, broken down by
product code, with indication of quantity and respective value, in order to determine
the VMP actually practiced by product code with these entities, where the VMP =
Total value of sales / Total quantities sold and is reflected in columns 5 and
10 of charts in annex 7;
2)
Sales
made to UK and French customers, separately, who purchased from A... the same product
codes as related entities L...UK and K...France, respectively, were extracted from
the SAFT of invoicing. This procedure made it possible to ascertain the actual
VMP per product code, for the unrelated entities, where VMP = Total value of sales
/ Total quantities sold and is reflected in column 15 of the attached chart 8
and column 11 of the attached chart 9;
3)
Insofar
as internal comparables were used, only the product codes of products sold
simultaneously to related entities and unrelated entities were selected, since
when there are no sales to unrelated entities we do not have those comparables,
nor was it feasible to obtain external comparables; 4)The comparison of the VMP
determined as described in
(1) with that determined under (2) and where the NAV of related entities (1) is lower than the NAV of unrelated entities (2)
The corresponding positive adjustments were determined. The calculation of such adjustments is shown in the following tables, where the amounts shown in column 9 refer to the adjustments to be made, which result from the following operation:
In which;
Column 2: quantity sold to related entities Column 7: PMV unrelated entities Column 4: PMV related entities
Based on the methodology described above, the corrections for the two related non-resident entities were determined as follows.
In short,
The analysis of the company's invoicing has demonstrated that different conditions were practiced in the transactions with related entities from those that would be practiced between independent entities, for which a positive correction to the taxable income is due. Therefore, under the terms set out in article 63 of the CIRC and in article 3(1) of Ministerial Order 1446-C/2011, of 21/12, and as the requirements of the grounds set out in article 77(3) of the LGT, as set out above, are met. The amount of €675,027.50 (€450,221.99 + 224,805.51), related to the PT adjustment inherent to the transactions carried out with non-resident related entities K...France and L...UK in 2016, must be added for purposes of determining the taxable income declared by the taxpayer.
After brief considerations as to the tax deductibility of expenses and losses, the necessary joinder of the taxable person" begins, rather than having concluded "that Article 23(1) of the CIRC", a conclusion that is rejected in the DA. In this regard it is alleged that, being in the presence of "a company of a markedly exporting nature" it receives payments in foreign currency from its clients "that it keeps in a "Client Reception Exchange in points 44 to 46 of the CA that:
Such operation, duly contracted with two banking institutions, namely with N... (here under analysis), implies a bank loan, with guarantee and collateral in which, A... is given the use of C currency in its current account, without the need to convert the currencies it holds in foreign currency, but the latter serving as collateral,
45.º
That is, through negotiation and contractualisation with the banking institution, A... uses a credit in Current Account, with more profitable and favourable interests, given the guarantee provided in foreign currency.
46. s This is clear from the contracts
now enclosed under Docs. Nos. 12,13,14 and 15. The above points lead to the existence
of a sequence of operations. Let us see:
-
A... maintains a "Customer
Receipt Exchange in foreign currency",
- This implies contracting a bank loan,
- Which in turn requires the provision of guarantee and
security.
As a result of the operations described above, the company does not need to convert the foreign currency it has in its possession into foreign currency, as this serves as a guarantee, and more favourable conditions are offered to it in the use of credit. It is important to note at the outset that the taxpayer's financial statements do not contain any of the following
"Customer Receipt Exchange in foreign currency", and then proceeded to analyse the contracts attached to the DA,
Doc. 12 relates to a current account credit opening contract concluded with N..., SA (N...) on 04/01/2016, for a period of !63 days, maturing on 15/06/2016,automatically renewable for successive periods of 90 days, unless notice of termination is given by either party, in the amount of 30,500,000.00, earmarked for "financing ad-hoc treasury needs" as stated in the same:
1.
Amount and purpose
1.1 The Bank hereby opens a credit
facility with a maximum amount of EUR 30,500,000.00 (thirty million, five
hundred thousand Euros) in your name(s). This amount is intended to finance occasional
cash requirements and is understood to be the maximum amount of credit to be
granted by the Bank at any time under this contract for the term
1.2.. The exercise by you(ies) of the right to use the funds under the credit hereby opened depends on the prior establishment and delivery to the Bank of the guarantee document(s), duly formalised under the terms of the "Guarantee" Clause, without prejudice to the provisions of the following paragraph. With regard to the interest rate of the loan, point 5 of the contract states that
The interest rate applicable to the present financing corresponds to the annual interest rate agreed for the financial application given as a pledge to the Bank, as mentioned in clause 10, Infra, in guarantee of the present contract, plus a Spread of 0.25000%. Considering that on the present date & the rate of the financial application is 0.25000%, the rate applicable to the present contract is 0.50000%, which corresponds to an effective annual rate (TAE) calculated in terms of the DL 2^0/94, of 23 August, of 0.50813%.
j
It is defined, as far as guarantees are concerned that:
10.2 To guarantee all responsibilities assumed or to be assumed by
V. (s) to the Bank, pledge(s) over financial investment(s) is (are) concluded, the overall amount of which must always provide, in relation to the maximum amount of credit opened under this contract, a degree of coverage equal to or greater than 105%, referred to as "initial coverage".
It is further expressly agreed that, should the overall
value of the investments pledged as collateral for this credit depreciate,
causing the pledge coverage level to become equal to or less than 103%
"replacement coverage level", the Bank has the right to require the
pledge collateral to be reinforced, and you jointly and severally with the pledging
debtor(s) have the obligation to reinforce it on one or more occasions by the means
and under the terms expressly agreed upon. You jointly and severally with the pledging
debtor(s) have the obligation to reinforce it, once or more times, by the
means, conditions and terms expressly agreed upon in the respective pledge
agreement(s), of which you declare to be aware, in order to always restore the
initial coverage level of the pledge collateral. Once it has been ascertained
that the pledge coverage level has decreased and is equal to or less than the
"replacement coverage level" referred to above in this clause, the
Bank will issue a written notice, also addressed to V. You(ies)
giving notice of the aforementioned depreciation and granting a period of 7
calendar days from dispatch to reinforce the pledge, failing which this pledge will
become immediately due and payable.
Given that the financial investment(s), object of the pledge, is(are) denominated in USD (United States Dollars) and GBP (Great Britain Pounds), the borrower, A... SA, to bear, at all times, any exchange rate depreciation that may occur.
Doc. 13 refers to the specific pledge agreement on term deposit(s) in foreign currency in guarantee of credit operation mentioned before, which was also concluded with N... on 04/01/2016, stipulating the following:
1. The first grantor(s) is (are) the
holder(s) of the Term Deposit(s) with the Bank, with the number(s), 297585456 in
Dollars (USD ) and with the number(s) 2897219184, in Pounds (GBP ),
respectively in the amount of USD 11.762,190.00 (Eleven Million Seven Hundred
and Sixty Two Thousand One Hundred and Ninety Dollars), and GBP 15,720,475.00
(Fifteen Million Seven Hundred and Twenty Thousand Four Hundred and Seventy Five
Pounds), respectively.
that it (they) may have Regardless of the numbering
SA, in favour of Banco N..., S.A., to guarantee the fulfillment of the responsibilities assumed by A... SA before the Bank, arising from the Pledged Current Account contract, in the amount of EUR 30,500,000.00 (Thirty Million Five Hundred Thousand Euros), which the Bank grants to it on this date, including reimbursement of the principal up to the aforementioned amount, the
...
Documents 14 and 15 relate to a current account credit facility agreement entered into with N... on 10/04/2015, in the amount of €22,300,000.00 and the specific pledge agreement on term deposit(s) in foreign currency in guarantee of that credit transaction, respectively, in all similar to documents 12 and 13 referred to above, for the 2016 period.
From the analysis of the documents attached to prove the operations described, it appears that they demonstrate that the company:
-In 2015 it had recourse to a credit of €22,500,000.00 and in 2016 it had recourse to a credit of €30,500,000.00, intended for the "financing of occasional cash needs", which, in fact, is in line with that stated in the draft report, to which reference is made, and where it can be read that, with value date of 4/1/2016, that is, the date of purchase of the currencies (GBP15.714,000 + USD11,514,000), the current account in N... with no...., which corresponds in the accounts to account 1227, registered an entry of €30,500,000.00, originating from the use of the current escrow account in N..., with no. , which settled the bank overdraft caused
by the purchase of the pounds sterling and US dollars;
-Made term deposits in foreign currencies (GBP and USD) as collateral required by the bank for the credit operation.
However, no evidence has been submitted that proves, as suggested in paragraphs 43 and 44 of the DA, that:
-
There is a "Customer
Receipt Exchange in foreign currency";
- The existence of this "Bolsa" implies recourse
to a bank loan;
-
The company benefits
from more favourable conditions when using the credit.
The taxpayer continues to justify the operations carried out on the assumption that everything is done in the interest of the company, because:
47.º
Furthermore, also as a financial and management strategy, and if at the end of each financial year the sale of foreign currency in the portfolio is not favourable, a simultaneous "sale" and "repurchase" of foreign currency is carried out, with the fixing of rates on the date of sale (See Attachment, Doa r\fl6).
48 This constitutes a liquidity input at the close of the annual accounts, 49
This is because, with the proceeds of the sale of foreign currency, it amortises financing, which it then uses to repurchase the same foreign currency, not in market terms but in an amount corresponding to the amount of the sale and in accordance with previously fixed rates, thus reflecting its true indebtedness at the end of the financial year", which enables the AT's assessment in Table 8, 50.º
Quite distinct from any speculative activity. 51.º
This is an operation that A... carries out every year, in every financial year (sale at the end of the year and repurchase in the first days of the following year).
The financial and management strategy that the taxpayer claims to follow is not reached from the previous points. In fact, all entities should define a strategy that includes a long-term action plan, involving the necessary financing decisions to achieve the pre-defined objectives with a view to the ideal level of investment and financing, which should always have in view the pursuit of the interests of the company. In this context, it remains, in our understanding, unexplained why, if the operations described are carried out in order to achieve a more favourable situation for A..., as stated in the DA, why they are carried out annually in every financial year, as the states and the documents themselves prove it. In fact, currencies are always sold with reference to the end of the year and repurchased at the beginning of the following year, with recourse to credit (see point 49 of the Principal Deed), irrespective of whether such transactions generate favourable or unfavourable results, as indeed the taxpayer demonstrates in the table at point 71 of the Principal Deed.
The operations carried out do not demonstrate the pursuit of a strategy, but rather the carrying out of pre-established operations, always performed according to the same sequence and on predetermined dates.
It should be noted here that the purpose of the DA is to allow the subject of the tax inspection procedure to participate in it, presenting the reasons, in fact or in law, why it disagrees with the proposed corrections presented in the draft report, which cannot be expressed only in a generic and abstract way, but must be duly accompanied by the correct grounds and documentary evidence, so as to be duly considered in the formation of the Administration's final decision.
The taxpayer also claims that the sums in question are 'amounts arising from the normal activity of the company - sale of goods and payments from non-resident customers', which in turn are 'repurchased' 'and reconverted in a Current Account, whose guarantee is the currency deposit itself, are used for payments arising from its normal activity'.
Although once again the foregoing is not demonstrated, it will always be said that there is a notorious contradiction, insofar as, on the one hand, it is the taxpayer himself who, in paragraph 49 of the DA, is decisive when he states that "with the proceeds of the sale of the foreign currency, he amortises financing, which he then uses to repurchase the same foreign currency" (emphasis added). And it could not be otherwise since, as was demonstrated in the draft report, the company does not have its own funds to invest in time deposits. On the other hand, as to the alleged "payments arising from its normal activity", it should always be noted that acquisitions to suppliers in currency other than the euro are not materially relevant, and few credits to the accounts of time deposits are relevant.
order in foreign currency (129) intended for payments to suppliers. Furthermore, as regards transactions with N..., note should also be taken of the statements of account 12917, in USD, and 12927, in GBP, attached as annex 11 (4 pages) and relating to transactions in foreign currency with that bank where, with the exception of the two movements indicated below, to the credit of account 12917, all other amounts recognised to the credit of the two accounts relate to term deposits and the sale of currencies and not to payments resulting from normal activity:
Obviously, as stated in point 54 of the DA, it is up to the taxpayer to decide whether or not to make term deposits, and it is up to the tax inspection to analyse this in accordance with the applicable rules in force.
A... maintains that the situation in question does not go beyond its normal activity because it results from the application of funds at its disposal in foreign currency arising from receipts from customers, allowing it to manage the sale of foreign currency in a more favourable manner and to obtain more favourable and profitable conditions in loans, referring again to the manner in which theoperations are carried out, with the sale, repurchase of foreign currency and repayment of financing. It is not understood how such operations can be considered "a way of using the funds available" to the taxpayer if, as shown in table 8 of the project, at the end of the periods 2014 and 2015 its level of indebtedness reached 62%, and in 2016 58%.
Points 64 to 70 of the DA concern the exchange rate differences associated with time deposits, with the taxpayer once again emphasising that "these are differences resulting from operations carried out in strict compliance with its scope and to meet its normal activity (receipt of clients and payment to suppliers)", which has already been shown not to correspond to the reality of the operations, as the company not only does not have surplus cash to be able to invest in time deposits, but also has not made any payments to suppliers of invoices denominated in pounds sterling (GBP) through the account of N... (...).
The taxpayer argues that the exchange losses with the Pounds Sterling in 2016 are justified by the fall of this currency in the foreign exchange markets as a result of the Brexit referendum. However, such claims do not change the conclusions of the draft report, since what is at issue is not the effectiveness of the recognized foreign exchange losses, which is not questioned by the AT, but the fact that they do not arise from the normal activity of the company. Lastly, the taxpayer concludes by stating that it always uses the same method, irrespective of whether the exchange differences are positive or negative, and that "performing an analysis of previous and subsequent years, there were years in which the exchange differences were positive, and their derecognition was not performed in the years in which they occur", enclosing to demonstrate this, statements of accounts "6863" and "78613" of the periods from 2014 to 2018. In this regard, it should be noted that the derecognition of positive exchange differences is not legally admissible, so that it is not possible to understand the objective of the taxpayer when making such allegations. As already widely set out, NCRF 23, in line with the accruals regime, determines the recognition of exchange rate differences in the periods in which they occur, and this procedure is accepted by the CIRC which specifically stipulates, with regard to income and gains, in paragraph 1 of article 20, that "Income and gains are considered to be those resulting from operations of any nature, as a consequence of a normal or occasional, basic or merely accessory action". (emphasis added)
Therefore, in view of all the above, the proposed corrections set out in section III.2.1.6. of the draft report are maintained, totalling €3,313,360.68 (€356,871.05 + €2,956,489.63).
The subject of transfer prices is dealt with as from point 120 of the DA, starting by repudiating the fact that the AT alleges "that A... was unable to present the DPT with the information legally demanded by nº 6 of art. 63 of the C.I.R.C. and Arts. 13 and 14 of Portaria n.º 1446-C/2001, de 21/12.º
Paragraphs 121 to 127 provide a brief legal approach to the matter in question, namely with regard to the relevant information and documentation that the taxpayer must keep organized, and it is claimed that A... has and presented such elements "and only did not provide better grounds because the inspection was suspended, without any request for additional information. It should be noted that, as stated in the draft report, in point 2) of the request for information made on 07/02/2020, the "Transfer pricing file" was requested, and the taxpayer submitted the document attached as Annex 6, which was duly analysed during the inspection procedure,
It is stated in the DA that the AT performed the analysis of the transactions with the related entities, based on the data contained in the SAFT of the invoicing. In fact, the analysis of the prices charged by the taxpayer, not only with the related entities, but also with the independent entities, was based on the invoicing data contained in the SAFT of the invoicing, since, as follows from the preamble of Port. 321-A/2007, of 26/03, the SAF-T (PT) (Standard Audit File for Tax Purposes
- Portuguese version) is a standardised file (in XML format) that aims to allow easy export,
at any time, of a predefined set of accounting and invoicing records, in a
readable and common format, independent of the programme
used, without affecting the internal structure of the programme
database or its functionality, providing the inspection services with vast
information that is easier to process. Therefore, all analysis tables were
drawn up based on A... available in its SAFT (PT) invoicing data.
The taxpayer is not right when it states, in paragraph 131 of the DA, that the AT does not give reasons for the omission made and merely presents inconsistencies, since the reasons for the conditions for determining the internal comparables, in accordance with paragraph 3 of Article 77 of the LGT, is made in a clear and exhaustive manner in the draft report, to which reference is made, indicating the obligations not complied with by the taxpayer in demonstrating the conformity of the prices practiced in the linked transactions with the arm's length principle.
Contrary to what is argued, the AT has not overlooked "that the selection of the most appropriate transfer pricing method depends on a number of factors, such as the nature of the transaction, the type of product and the sector of activity". In fact, in addition to having followed the method indicated by the taxpayer to determine transfer prices in accordance with the arm's length principle (MPCM), essential comparability factors were considered:
- The selection of independent
entities that operate in the same geographic market, contrary to what was
followed by the taxpayer in the DPT, in which it includes, in the comparable
entities, customers that operate in different geographic markets and, consequently,
will have operations with more disparate economic characteristics;
- The comparison of the VMP for the
same product code transacted was carried out, selecting only those product codes
sold simultaneously to related and unrelated entities, and only for those were
the adjustments determined, when the VMP related to related entities is lower
than the VMP practiced with unrelated entities.
From this it can be concluded that no 'clean slate of the taxable person's activity' was drawn and no 'wrong premises and disparate comparisons' were made. It is not enough for a taxpayer to claim that no one knows its activity better than it does "and as such better establishes the correct comparables", as it is the taxpayer's burden of proof in the application of the rules on TP in order to prove that the transactions it carried out with related entities do indeed respect the arm's length principle. And if the AT did not seek further clarifications, it was because the combination of the elements contained in the DTP with all the invoicing information extracted from the SAFT (PT) allowed it, on the one hand, to conclude that the comparables used by the taxpayer to justify the compliance of bound transactions with the arm's length principle do not meet the requirements imposed by the CIRC and by Ministerial Order 1446-C/2001, of 21/12, and, on the other hand, enabled the determination of comparables that allow the degree of comparability required by the arm's length principle between bound and unbound transactions.
It should be noted that point 149 of the DA states that if the AT "had proceeded in a spirit of cooperation, it would have been provided with the information that, with regard to K..., the 2016 sales are solely and exclusively of Electrowelded mesh". However, such assertion has no grounds, as the AT easily reached this conclusion by analysing the SAFT (PT) of the invoicing, as one can read at the end of page 49 of the draft report that:
"In the period under review K... France only purchased from the taxable person products of the "electrowelded mesh" family, for a total amount of 5,041,166.11 and the taxpayer has indicated a PVP for the related entity of €0.45".
In paragraphs 150 to 152 of the DA, the taxpayer refers, for the first time, to the transport of the products to K...France, stating that from Portugal to France the transport is made by ship, while for the other entities the transport is normally made by lorry, without, however, attaching any supporting documents to prove his allegations:
150.º
It should be noted that the transport used from Portugal to France (port of ...), for all sales to K... Franca, is by ship, in conventional cargo, and chartered in its entirety in order to have a more economical transport cost,
151.º
This situation does not occur in the other entities analysed (Independent entities), where transport is normally done by truck, direct, between A... and the customer's final address, but still with a rather disparate associated cost.
152.º
We cannot forget that the prices considered have included the respective transportation price, so that the comparability degree is not assured. In addition to not attaching to the DA any documents relating to the transport of the products, it is surprising that the taxpayer states that the AT considered "clients with different transport methods and different transport costs, which causes different prices". In fact, if anyone considered clients with different transport conditions it would have been A..., since, as may be seen on page 18 of annex 6, whose figure is reproduced below, in the taxpayer's DPT entities operating in the English market, others in the French market and others still in the Portuguese market were included in the "Non-associated companies", for which the transport certainly does not take place by boat.
The AT limited the independent entities to customers operating in the same market as the related entity and purchasing exactly the same product code. In DA comes the taxpayer to believe that for K...France sends the products by ship and for the other French customers "the transport is normally done by truck", Also the alleged in point 153 of DA, does not make, in our understanding, any sense, being stated that:
It would also be explained to him that, as welded mesh is sold per m2 (and as there is no other product measured in such dimensions), the computer system must convert all such items to kg for comparability.
Firstly, comparing sales of electrowelded mesh with sales of other products is not at all the best way to achieve the highest degree of comparability between related and unrelated transactions, as imposed by the PT policy, since, as already mentioned in the draft report, only transactions in which the main economic and financial characteristics are "similar or sufficiently similar" are legally considered comparable, and article 5 of Port. 5 of Port 1446-C/2001, of 21/12, establishes as the first factor to be taken into consideration the specific characteristics of the goods object of the transaction, which must obviously be similar.
In addition to the above, the conversion of m2 into Kg is not relevant to the analysis carried out insofar as, given the diversity of products included in the various families considered by the taxpayer, the AT compared the PMV for each product code sold to related companies with that of independent entities, and in relation to welded mesh, only m2 was used as the unit of measurement.
The taxpayer also states that, after determining the average price of the electrowelded mesh, it is the system itself that compares the related entities with the independent entities with the lowest price. In this regard, it should always be taken into account that any system must be in accordance with the legal rules and precepts, whether accounting or tax relevant, from which it follows that, if this is the case, the system is not complying with what is legally established. And this happens, from the outset, because it is selecting, for comparison purposes, the entity "M..., SÁ", which is92% owned by "G..., SA", which, in turn, is 83.53% owned by A..., from which it follows that the entity selected is indirectly owned by the subject
However, art. 63.4 of the CIRC states that "Special relations between two entities are considered to exist in situations in which one has the power to exercise, directly or indirectly, significant influence over the management decisions of the other, which is considered to have occurred, namely, between:
a)
an
entity and the holders of its capital, or their spouses, ascendants or descendants,
holding, directly or indirectly, a holding of not less than 20% of the capital
or of the voting rights;
It is therefore concluded that the system is including in the "independent" entities an entity that cannot be considered as such, as it is legally classified as a related entity.
It is also not clear how the selection of independent entities with the lowest price is made, as it does not make sense to select entities to which the product for which the best comparables are being determined is not sold, as is the case of "P... Limited".
The taxpayer also justifies the use of the PMV per Product Family with the fact that "if it were performed per article, the price obtained would be fallacious, since there are many articles that do not have monthly sales and have considerable oscillations throughout the year". However, with all due respect, if oscillations occur per product, considering a vast group of products (family) for comparison purposes, the existing oscillations are much greater, since they correspond to those of all the products that are part of the family, and therefore the price obtained is more fallacious than the one obtained using an MPV per product.
In addition to the above, the taxpayer also claims that, with regard to K... France, the AT "makes a comparative analysis, but starts from assumptions different from the methodology it had bound itself to apply" since it "chooses to perform annual arithmetic averages, article by article, for the related entities", but "for the independent entities, it does not consider total quantities, but rather specific months, choosing always by choosing the months where the price is highest (and most favourable to their intentions)".
In this regard it should be clarified that, in fact, total sales values were not considered because, according to the SAFT(PT) invoicing data, there are two distinct measurement units: m2 and panels. Given that the data concerning panels showed residual values when compared with m2, the AT chose not to include them in its analysis, as it had no credible elements to convert panels to m2. It should be noted that this situation has nothing to do with the choice of specific months, as the taxable person would have you believe, and occurs not only for independent entities, as mentioned in the SO, but also for K France, for the two products identified in the following table.
The new elements brought to the file by the taxpayer in the AD, namely Doc. No. 47 where the total quantities sold to independent entities in m2 are stated, and the table on page 28 of the application, in which the conversion factor Q(Kg) / Q(m2) is indicated, allowed the recalculation of the adjustments to be made, including in the analysis the invoiced panels, thus overcoming the gap pointed out in the AD. Bearing this in mind, the tables in Annex 13 show the recalculated VMP, based on quantities in Kg and m2, and of the products included in the adjustments proposed in the draft report, it was concluded that the following were sold to the related entity for a VMP higher than that of the independent entities, which will therefore be excluded from the calculation of the final adjustments to be made.
Based on the methodology described in the draft report, to which reference is made, but taking into account the new facts of the AD as set out above, here follow the calculations inherent to the determination of the corrections to be made for K... France, using the two measurement units: Kg and m2.
In short, the information provided by the taxable person in the AD, and which culminated in the analysis described above, does not make it possible to prove that the conditions applied in the transactions with K... France are identical to those practised between entities
Therefore, a positive correction to the taxable amount of €260,710.71 is due, in accordance with article 63 of the CIRC and article 3(1) of Port. It should be noted that, as could be expected, regardless of whether the unit of measurement used is kg or m2, the conclusions obtained are exactly the same, as shown in the preceding tables.
From paragraph 166 onwards, the taxpayer refers to the transactions with F.UK, stating again that the AT has again carried out a biased analysis, which is immediately demonstrated "by the percentage of sales that it analyses (about 32% of total sales)". This is clearly stated in the draft report, to the extent that, as the taxpayer did, internal comparables were used to determine the LMPs. Thus, in the analysis performed, it was only possible to include the codes of products sold simultaneously to related entities and unrelated entities, to the extent that, when there are no sales to unrelated entities, those comparables are not available, nor was it feasible to obtain external comparables, so conditions were not met to include a larger volume of sales.
The taxpayer continues that, although the AT has respected the indicated methodology, which is understandable, insofar as in the invoicing data to L...UK there is no unit of measurement "Panels" and the total quantities sold are included, the PMV obtained is fallacious due to the fact that many articles do not have monthly sales, presenting in point 169 of the DA "The correct comparison between related entities and independent entities, article by article, with m2 and monthly price (...) and which contradicts the conclusions drawn by the AT".
We reproduce in the following figure the table included in the DA and which, in our understanding, does not contradict the conclusions of the draft report, regarding the transactions with L...UK.
It should be noted that, pursuant to article 8(1) of the CIRC, IRC "is due for each tax period", which in the case of the taxpayer under analysis coincides with the calendar year, therefore the taxable event occurred on 31/12/2016. In this regard, PT's policy does not provide otherwise, and therefore, the analysis presented in the AD, in which it exhibits comparative monthly NAVs, is not consistent with the requirement of adjustments to the taxable income, whenever the arm's length principle is not respected, as was the case.
Without waiving, even if such analysis were admissible, we find that in the months in which there are, simultaneously, sales to L...UK and to independent entities, the PMV indicated for the latter is higher than that indicated for L... UK in all the situations indicated in the previous table (month of June), which reinforces the AT's conclusions.
The taxpayer also claims that, given the weight of the sales to related entities in relation to the total sales to the French and English market, it is understandable that a competitive price should be attributed, always respecting the market rules. However, it neither substantiates nor proves the claims made, in the context of respect for the legally required principle of full competition.
As a result of the above analysis, the arguments of the taxpayer regarding the corrections proposed in item III.2.1.7 and part of the corrections in item III.2.1.8 are upheld, as summarised below:
The following table summarises the corrections to the taxable income resulting from the inspection procedure.
In view of the final corrections presented, the corrected taxable income is EUR 9,210,696.99 (EUR 5,410,765.39 + EUR 3,798,876.90), and so the following
tables show the recalculation of the amounts of state and municipal surcharges.
E)
Following the inspection, the Tax
and Customs Authority issued the Corporate Income Tax assessment for 2016, with
no. 2020..., of 04-11-2020, and the respective compensatory interest
assessments no. 2020..., 2020... and 2020..., as well as the respective
statement of account adjustment no. 2020... (document no. 1 attached to the request
for arbitration award, the content of which is hereby reproduced);
F)
A... is a family company of an
essentially export-oriented nature, having foreign customers especially in the
United States of America and the United Kingdom, to whom it sells on a regular basis
(RIT and witness statement Q...)
G)
Steel is the raw material that A...
uses in its activity (RIT and witness statement Q...);
H)
Sales that the Claimant makes to
the United States of America are paid in US Dollars (USD) and sales to the
United Kingdom are paid in Pounds Sterling (RIT and testimonies of witnesses
Q... and R...);
I)
The Claimant has bank accounts in
various currencies in Portugal and abroad (testimonies of witnesses Q... and
R...);
J)
To avoid having to convert each
payment into pounds at the time it is received, and being subject to the
volatility of exchange rate changes, the Claimant maintains an account in
pounds, with the intention of making the conversion into euros at a time that is
more advantageous to her (statements of witnesses Q... and R...);
K)
The Applicant needs the money from the
sales in pounds for its current management and, in order to be able to dispose
of it, it entered into a financing contract with the N... Bank, keeping with
the financed money an account in euros, which serves as security the pledge of
the deposit in pounds (documents nos. 12 to 24 annexed to the exercise of the right
to be heard and testimonies of witnesses Q... and P...);
L)
At the end of each year, the Claimant sells to Bank N of the
amount in pounds
that it has and amortizes the financing, so that the balance
sheet reflects the net worth of the Applicant in each financial year and, days
later, it again acquires the currency it had sold and makes a new
financing in euros, to maintain an account under the same terms (documents nos.
12 to 24annexed to the exercise of the right to be heard and testimonies of witnesses
Q... and R );
M)
The sale and repurchase of pounds referred
to in the previous paragraph are made at the same exchange rate, as agreed between
the Applicant and Bank N....
(statements of witnesses Q... and R... and document no. 16 of
the exercise of the right to be heard);
N)
With these operations, which it
performs annually, there are years in which the Applicant makes a profit and
others in which it makes a loss (documents nos. 25 to 35 of the exercise of the
right to be heard, the contents of which are hereby reproduced, and the
testimony of witnesses Q... and R );
O)
The Claimant uses the euro escrow
current account as a mirror account of the foreign currency accounts (GBP and USD),
the balance of which must be equal to a minimum of 103% to 105% of the amount
it is authorised to move on credit (documents no. 12 and 13 annexed to the
exercise of the right to be heard and testimonies of witnesses Q... and R );
P)
The amounts in the euro account are
used by the Claimant for its day-to-day business (witness statements Q... and R...);
Q)
In addition to these euro payments,
the Claimant sometimes uses foreign currency accounts to make payments abroad
without having to convert (witness statement Q...);
R)
The Claimant has contracts similar to
those it entered into with N..., but the Tax and Customs Authority only made corrections
in respect of this and only in the year 2016, as in inspections carried out for
the years 2017 and 2018 it did not make any identical correction (witness statement
R...);
S)
The Claimant's activity consists in
making electrowelded mesh by stretching steel, which
is the only raw material, the contact points between bars being welded by an electric
welding process (witness statement Q...);
T)
There are nets with different
densities of steel per square metre, increasing the weight
per square metre when the mesh is tighter (witness
statements Q... and R...);
U)
The selling price is calculated in
kg and not on the basis of the area of the net and the purchase of steel is
also made on the basis of kg (statements of witnesses Q..., R... and S...);
V)
On sales invoices reference is made
to square metres, because historically civil engineers
calculate in square metres, indicating the type of mesh
they want (witness statement Q...);
W)
The Claimant calculates the weight
that corresponds to the area of each type of net, having a formula, which underlies
each of the 166 product codes it uses, to calculate the mass corresponding to the
area of each one (witness statement Q...);
X)
Most of the 166 codes referred to
relate to products purchased by one customer only, and it is not usual to have
more than one customer for the same type of knitwear (witness statement Q...);
Y)
The 166 codes refer to very different
products, with a wide range in weight, some products weighing twice as much as
others (witness statement of S );
Z)
In the comparisons made regarding
transfer prices the inspection did not consider relevant the months of 2016 in
which the transactions were made (testimony of witness S );
AA)In
the comparisons made, the tax inspectorate did not take into account the quantities
that were sold to each customer in each transaction (witness statement S );
BB)
The price of each type of net varies according to the weight
and not the area (witness statement Q );
CC)About
70% of the price of the electrowelded mesh aims at
compensating the value of the steel, which is the only raw material used (witness
statement Q );
DD)The
price of steel is very volatile, varying throughout each year, including in
2016, peaking in the month of December (testimony of witness Q and chart in Article
159 of the request for arbitration award, whose
correspondence to reality is not questioned);
EE)
The Claimant only makes sales to resellers and does not sell
directly to builders (witness statement Q );
FF)
The sales prices to the Claimant's company in the United
Kingdom and France are CIF (Cost, Insurance
and Freight), and the goods are shipped by sea and delivered to the warehouses
of those companies located in the ports of Liverpool (Mersey Wharf) and Rochefort,
respectively (witness statement Q and documents
nos. 12,
13, 14 and 15 attached to the request for an arbitration award,
the contents of which are hereby reproduced);
GG)
When the Claimant makes sales to customers other than its
businesses in the UK and France, prices, as a rule, are DAP (Delivered at Place) and must include the cost of land
transport between the port and the customers' premises (witness statements Q...
and R );
HH)
THE L... UK and K... France are large wholesalers who purchase
from the Claimant in large quantities (witness statement Q...);
II)
Sales to L... UK account for 63% of sales of electrowelded mesh in the UK market (witness statement
Q...);
JJ)
The Claimant's sales to K... France account for 60% of sales
of electrowelded mesh in the French market (witness
statement Q...);
KK)
The average selling prices in the year 2016 on the UK market
in respect of the largest customers, namely T... LIMITED (average price of
€0.426 per kg, for a quantity of 9,181,234 kg) and U..., LTD (average price of
€0.421 per kg, for a quantity of 8,061,488 kg) are lower than those for L... UK
LIMITED in that year (0.467 Euro per kg for a quantity of
12,061,063 kg);
LL)
The average sales prices in 2016 on the French market for the
largest customers, namely V... (average price of 0.511 per kg, for a quantity of
3,743,522) and W....
(average price of 0.489 per kg for a quantity of 2,857,932
kg) are lower than those for K SARL in that year (0.45 per kg, for a quantity
of 11,209,192 kg) (table in
Article 372 of the Arbitral Award Request, whose lack of
correspondence to reality is not invoked);
MM)
The Claimant submitted all the documents that were requested by
the tax inspection services (witness statement X );
NN)When
the pandemic was declared in March 2020, the tax inspection services stopped going
to the Claimant's premises (witness statement X );
OO)
The tax inspectorate looked at transport, comparing companies
in the same geographical area, but did not establish whether or not the prices
were CIF and this was not in the transfer pricing file (witness statement of Mr.
S.);
PP) On 04-02-2021, the Applicant provided the bank
guarantee stated in document no. 16 (presented on 25-10-2021, which content is hereby
reproduced), for suspend the tax execution proceedings No. .. .2021...,
initiated for the forced collection of the amount assessed;
QQ) On
05-04-2021, the Claimant submitted the request for the constitution of the arbitral
tribunal which gave rise to the present proceedings.
2.2.1. It
has not been proven that the foreign currency accounts that the Claimant maintains
result from an investment intention with speculative purposes. In fact, the
evidence produced is to the effect that these accounts result from payments in
foreign currency that the Claimant receives from its clients and which it does not
intend to convert into euros.
2.2.2. The
facts were proven on the basis of the documents provided by the Applicant and those
in the administrative file and, on the points indicated, also on the basis of testimonial
evidence.
The witnesses appeared to testify impartially and with
direct knowledge of the facts that were proven on the basis of their
testimonies.
Witness Q... has been director of operations of the Claimant
since 2008. Witness R has been a certified accountant for the Claimant for about
2 years.
Witnesses X... and
S are the tax inspectors who carried out the inspection.
The Applicant is mainly engaged in the production of electrowelded steel mesh, mostly destined for export.
The Autoridade Tributária
e Aduaneira (Tax and Customs Authority) carried out
an inspection action on the Applicant for the 2016 financial year, having made
several corrections, of which are challenged in the
This case concerns the non-acceptance of the deductibility of
financing costs with the acquisition of foreign currency and exchange rate
changes and those concerning transfer pricing.
The applicant attributes to the corrections made by
the Tax and Customs Authority errors of factual and legal assumptions and procedural
flaws, namely violation of the principles of inquisitorial and substantive
truth, proportionality, adversarial procedure and cooperation.
The Claimant, among its exports. habitually makes
sales to UK customers which are paid for in pounds sterling (GBP).
As is clear from the
established facts:
– to
avoid having to convert each payment into pounds at the time it receives the amount,
and being subject to the volatility of exchange rate changes, the Claimant maintains
an account in pounds, with the intention of making the conversion into euros at
a time that is more advantageous to it;
– as
the Claimant needs the money from the sales in pounds for its current management
and, in order to be able to dispose of it, it entered into a financing contract
with the N... Bank, keeping with the financed money a euro account, which serves
as security for the deposit in pounds.
-at the end of each year, the
Claimant sells to Bank N of the amount in pounds it has available and
amortizes the financing, so that the balance sheet mirrors the equity reality
of the Applicant in each financial year and, days later, it acquires
again the currency it had sold and makes a new financing in euros, to maintain
an account under the same terms, being the purchase and sale of currencies made
at the same previously agreed rate;
– with
those operations, which it performs annually, there are years in which the Applicant
makes a profit and others in which it makes a loss, in addition to bearing charges
for bank financing.
The Tax and Customs Authority made a correction, not
accepting the relevance of the financing expenses for the formation of the
taxable income, as it understands that the purchase and sale of pounds
constitutes an investment of speculative nature, unrelated to the activity of the
Applicant.
In short, the Autoridade Tributária
e Aduaneira argues as follows:
The general rule laid down in Article 23 of the CIRC is that only "expenses and losses incurred to obtain or guarantee income subject to IRC" are deductible. In other words, the rule requires a causal link between the expenses incurred and the income obtained in order to prevent the inclusion of expenses incurred in the pursuit of interests unrelated to the taxpayer himself.
Moreover, Article 23(2) specifically addresses subparagraph c) to expenses of a financial nature, which addresses the destination given to financing and restricts the deductibility of those expenses to those resulting from "borrowed capital applied in the operation", i.e. to meet the expenses that a company incurs to ensure the exercise of its activity, which in the case of A... is the "Manufacture of wire derivative products and other miscellaneous metal products", as derives from the Company's Commercial Registry Office Certificate. Thus, only financing costs resulting from loans contracted to apply this activity will be accepted. namely, in operating costs that give rise to outflows of monetary flows, such as wages, raw materials, energy, purchase of tangible fixed assets, etc.
The Claimant argues
as follows, in brief:
– the indispensability
of expenses should, in a general plan, be understood as considering as deductible
those that are incurred in the interest of the company, in the pursuit of its
activities.
– according
to the wording of article 23, no. 1 of the CIRC, the deductibility of expenses does
not depend on whether they are indispensable for obtaining or guaranteeing the
income subject to tax, it being sufficient that the expenses have been incurred
in the interest of the company, nor of the existence of a direct causal link between
the expenses and gains;
– the
Claimant does not invest in pounds, the amounts held in the account in pounds are
derived from payments from its customers, which it intends to maintain until such
time as it finds it more advantageous to exchange pounds into euros;
– the
purchase and sale transactions, at the end and beginning of each year, at the
same rate previously agreed, is intended to record each year the equity
differences derived from the exchange rate variations and to maintain this deposit
of the amounts received until the moment comes for a definitive transaction
under advantageous exchange conditions.
The concept of indispensability of costs, to which
article 23, no. 1, of the CIRC refers, refers to costs incurred in the interest
of the company or borne within the scope of the activities arising from its
corporate scope (business purpose).
Only when the costs result from decisions that do not meet such requirements,
namely when they do not present any affinity with the company's activity,
should they be disregarded, as stated in the judgment of the Plenary of the Supreme
Administrative Court of and 27-06-2018, case no. 1402/17:
As to the indispensability of costs, as has been stated by the reference doctrine (António Moura Portugal, A Dedutibilidade dos Custos na Jurisprudência Fiscal Portuguesa e Tomás de Castro Tavares, Da Relação de Dependência Parcial entre a Contabilidade e o Direito Fiscal na Determinação do Rendimento Tributável das Pessoas Colectivas, Ciência e Técnica Fiscal no. 396, pp. 7 to 180, and also the most significant case law.396, pages 7 to 180) and also the most significant case law, the concept referred to in article 23 of the CIRC has been linked to the costs incurred in the interest of the company or borne within the scope of the activities deriving from its corporate scope.
Only when costs result from decisions that do not meet such requirements, namely when they have no affinity with the company's activity, should they be disregarded.
As stated in the Judgement of this Supreme Administrative Court of 28.06.2017, issued in appeal 627/16, "in the understanding that doctrine and jurisprudence have been adopting for the purpose of ascertaining the indispensability of a cost (cf. art. 23 of the CIRC in the wording in force in 2001), the AT cannot syndicate the goodness and opportunity of the economic decisions of the company's management, under penalty of interfering in the freedom and autonomy of the company's management.
Therefore, a cost or loss will be accepted for tax purposes if, in an assessment made at the time it was incurred, it is appropriate to the productive structure of the company and to obtaining profits, even if it proves to be a fruitless or economically ruinous operation, and the AT may only disregard those which do not fall within the scope of the taxpayer's activity and were incurred, not in the taxpayer's interest, but for the pursuit of objectives that do not belong to the taxpayer (when it is concluded, in the light of the rules of common experience, that they did not have the potential to generate income)" - in this sense see also the judgements of the Tax Litigation Section of this Supreme Administrative Court of 30 November 2011, appeal no. 107/11, and of 24 November 2010, appeal no. 107/11.No. 107/11, and of 24.09.2014, appeal No. 779/12.
Therefore, the concept of indispensability of costs as
stated in article 23 no. 1 of the CIRC does not require a causal connection
between costs and income, it is enough that the expenses have a relation with
the company's object, are incurred within the scope of its activity or show a business purpose.
For this business
purpose to exist, it is not necessary that the expenses have a direct relation
with the operational activity of the taxpayer. (1 )
1 In
this sense, see TOMÁS TAVARES, Da relação de dependência parcial entre a
contabilidade e o direito fiscal na determinação do rendimento tributável das
pessoas colectivas: algumas reflexões ao nível dos custos, in Ciência e Técnica fiscal, no. 396, 1999,
pp. 136-137: "The legal notion of indispensability is, therefore, cut out from
an economic-business perspective, through the fulfilment, direct or indirect,
of the ultimate motivation for
obtaining profit. Indispensable costs are equivalent to expenses incurred in the interest
of the company or, in other words, in all acts which can be abstractly subsumed
under a profit-making profile. This intention deliberately brings the economic
and tax categories closer together through a primarily logical and economic interpretation
of legal causality. Essential expenditure is equivalent to any cost incurred in
order to
In the present case, the management by the Claimant of
the pounds account, waiting for the most appropriate time to trade them, is
clearly carried out in the interests of the Claimant, so the bank charges incurred
to materialize this management are tax deductible.
On the other hand, it is also clear from the evidence
produced that the maintenance of that account in pounds and the annual
acquisitions subsequent to sales of the same amount do not have underlying an
intention of speculative investment, as wrongly concluded by the Tax and
Customs Authority, which, as the Claimant argues, did not properly perceive its
business strategy.
The fact invoked by the Tax and Customs Authority, in
the RIT and in the present proceeding, as indicating that the Claimant would
not have the purpose of keeping the pounds until the most favorable moment to
carry out the conversion, which is the fact that there was a strong devaluation
of the pound in 2016, without the Claimant converting them, rather than contradicting
this objective of maintaining the account in pounds, it rather confirms it,
since, obviously, the most appropriate moment for the Claimant to carry out the
conversion would be when the price of the pound is high, generating gains, and
not when the price is low, in which the conversion would lead to the irremediable
assumption of losses.
In view of the above, this correction is vitiated by
errors of fact and law assumptions which justify its annulment, under the terms
of Article 163(1) of the Administrative Procedure Code, applicable subsidiarily
under the terms of Article 2(c) of the LGT.
The request for arbitral award regarding this
correction, due to defects that prevent the renewal of the assessment, is
prejudiced, as it is useless (articles 130 and 608, no. 2, of the CPC), the
knowledge of the remaining defects that are imputed by the Applicant.
obtaining income and
which represents an economic loss to the company. As a rule, therefore, the tax
deductibility of the cost depends only on a causal and justified relationship
with the production activity of the company".
(...)
"The
legal concept of indispensability therefore represses acts that do not comply
with the company's purpose, that are not in the company's interest, especially as
they are not profit-oriented...".
In truth, article 124 of the CPPT, applicable
subsidiarily by virtue of the provisions of article 29, no. 1 of the RJAT, by establishing
an order of acknowledgement of defects, presupposes that, once a defect that
ensures the effective protection of the impugned act's rights has been judged
valid, it is not necessary to assess the remaining defects, because if it were
always necessary to assess all the defects imputed to the impugned act, the
order of acknowledgement would not matter.
For the foregoing reasons, the remaining defects
imputed by the Applicant to this correction are not cognisable.
The Tax and Customs Authority did not accept the
deductibility for taxable income of exchange losses in pounds sterling arising
from the aforementioned term deposits, recorded in account 13217, because it
considered, in short, that "assuming the term deposits an absolutely abnormal
and speculative nature, the negative exchange differences relating to their valuation,
as components of their value, are not deductible for purposes of determining
the taxable income, so that the amount of €2.956.489,63 (€79.946,96 +2,876,542.67)" and because "they do
not result from the normal activity of the company".
Negative exchange rate differences are expressly provided
for in Article 23(1)(c) of the CIRC as a type of deductible expense for the formation
of taxable profit.
As stated in the previous point, the creation and
maintenance of the aforementioned time deposits constitute management acts
carried out in the corporate interest, with a view to enabling the conversion of
pounds into euros at a time when the exchange rate is favourable.
Therefore, the losses arising from negative exchange
rate differences that the Claimant has borne derived from maintaining these
deposits, which arise from the Claimant's business activity, which are tax
deductible.
The request for arbitration on this issue is therefore
founded.
The Tax and Customs Authority made corrections to the Taxable
Income of the Applicant based on the transfer pricing regime foreseen in article
63 of the CIRC.
The Tax and Customs
Authority has understood, in summary, the following:
– The
onus is on the taxable person to prove that its transactions with related
entities comply with the arm's length principle;
– the
Claimant used the comparable market price method (MPCM), but the comparables
used by the taxpayer to justify the compliance of related transactions with the
arm's length principle do not meet the requirements imposed by the CIRC and by
Port. 1446-C/2001, of 21/12, thus not providing the highest degree of comparability
between related and unrelated transactions. Consequently, there was a violation
of the arm's length principle in the sales made to related entities, and no adjustments
were made for purposes of determining the taxable income;
– by
applying the MPCM "the selection of
independent entities operating in the same geographic market and the comparison
of the MPV for the same product code transacted were considered as key
comparability factors and the methodology described below was followed:
1)
All
sales made to related entities L...UK and K...France were extracted from the
SAFT invoicing, broken down by product code, indicating the quantity and respective
value, in order to determine the VMP actually practiced by product code with
these entities, in which the VMP = Total value of sales / Total quantities sold
and is reflected in columns 5 and 10 of the charts in annex 7;
2)
Sales
made to UK and French customers separately, who purchased from A... the same
product codes as related entities L...UK and K... France, respectively. This
procedure made it possible to ascertain the actual VMP per product code, for
the unrelated entities, where VMP = Total value of sales / Total quantities sold
and is reflected in column 15 of the attached chart 8 and column 11 of the attached
chart 9;
3)
Insofar
as the use of internal comparables was followed, only the codes of products
sold simultaneously to related entities and unrelated entities were selected,
as when there are no sales to unrelated entities we do not have those comparables,
nor was it feasible to obtain external comparables;
4)
The
NAV determined as described in paragraph (1) was compared with the NAV determined
in accordance with paragraph (2) and, whenever the NAV of related entities (1)
is lower than the NAV of unrelated entities (2), the corresponding positive adjustments
were determined.
– AT compared the average selling
price (ASP) for each product code sold to related companies with that of
independent entities, and only used the m2 as the unit of measurement for the electrowelded mesh;
regardless of whether the unit of measurement used is the Kg or the m2, the conclusions obtained are exactly the same, as shown in the previous tables.
The Claimant argues as follows,
in brief:
-it is on the AT to
prove the legal assumptions that legitimise its action;
– even
in the absence of a transfer pricing file, that fact alone is insufficient to legitimise the action of the AT, which is not exempted from
demonstrating the assumptions that legitimise its action;
– the
price of traded goods depends essentially on the variation in the price of
steel, which is very volatile and impossible to predict or anticipate far in
advance, as happened, in particular in that year 2016;
– the
analysis of the SPD in the RIT is inevitably conditioned and compromised by the
inadequacy of the steps taken by the AT during the tax inspection;
– that
AT compared average prices per Kg with average prices per m2, comparing a unit
of mass with a unit of area sought to obtain equivalent values, which is not possible;
– the
comparison by product family is adequate and proves to be the best comparable
when considering the unit of measurement of mass. As it is the only unit of measurement
that allows comparison of products;
– The
comparison by product family also has the obvious advantages of substantially
increasing the sample population, which guarantees less impact on the price
variations of raw materials throughout the year and less influence of other elements
that determine comparability in the calculation of a VMP;
– The
comparison by product code leads to a very substantial reduction of the sample population
(which is reduced to a single unit in most cases), comparing in practice two
sales, occurring throughout the year in different periods, which increases the influence
of other elements determining comparability in the calculation of a VMP, such
as, for example, the variation in the cost of raw materials throughout the
year, the quantities sold and the means of transport used, the different
position of the operators in the distribution chain, and the fact that the
comparison is made by a single unit marketing, the date on which the sales are
established independently of the date on which the respective invoices are issued
and the tasks, risks and costs assumed by the parties;
– in
2016, in most cases, the entities compared by the AT made purchases in 2 or 3 months
of the year, always in different months;
– the
AT failed to investigate the necessary facts, the inspection having been suddenly
and summarily interrupted, with violation of the principles of inquisitorial
inquiry, cooperation, adversarial proceedings and legality in the search for the
material truth;
– the
TA has not yet attended to other determinants of comparability beyond the cost of
raw materials, such as:
a.
sales volume;
b. quantities supplied
and associated discounts;
c. date and time of the
transactions or the pricing of the order;
d. tasks,
risks and costs assumed by the parties and their reflection in the agreed price
(ex-work, DAP, CIF, etc);
e. functions performed,
f. transport costs,
g. different positions
in the marketing circuit and
h. other economic circumstances.
– The
AT merely compared average prices, without considering the essential assumptions
of their formation, which it ignored;
– the
entities with which the AS enters into linked transactions operate, in those markets,
as large wholesalers (traders), with a view to distribution;
– the
independent entities compared are, as a rule, companies that purchase with a view
to direct integration into their production circuit or operate as retailers, selling
to construction companies;
– the
conditions negotiated between the ancillary system and its largest customers include,
as a rule, quantity discounts, negotiated on a case-by-case basis, from which not
all the customers analysed benefit;
– the PMV to the
only customers that meet the minimum comparability requirements is manifestly lower
than the PMV to the related entity L...UK;
– on
the French market there is not even one entity that, in terms of sales volume, can
be considered comparable;
– the
sales made to related entities are characterised by stability and
predictability, adapting to the production cycles of the Applicant, and are
preferably made when the price of steel is lower;
– the
selling price to related entities L.. UK and K... is CIF, which is not the case
for independent entities;
– only one or two customers
in the UK purchase complete vessels;
– and
even in these cases, it is the SP who bears the transport costs from the port
to the client's warehouse or to the client's final customer, as the case may
be, which is by land;
– the
agreed price being DAP, the ancillary system assumes the obligation and bears the
cost of delivery at destination;
– If
we deduct the cost of inland transport from the DAP price reflected on the invoice,
we arrive at a comparable CIF price that is lower for independent entities than
for related entities;
– in
sales to entities with which it carries out related-party transactions, the solvency
risk and, consequently, collection risk, is practically non-existent;
– and
payment deadlines are shorter, with obvious advantages in terms of cash flow;
– all
of which is very different from sales to other operators in those markets who purchase
the same type of goods directly from the Claimant, who takes the risks of collection
and payment deadlines are longer;
– excluding
from comparables all products that, although belonging to the same family of
products, the selling price to related entities is lower than the selling price
to unrelated entities.
The Autoridade Tributária
e Aduaneira, in the present case, reaffirms the
position taken in the RIT.
The Tax and Customs Authority made corrections based on
the transfer pricing regime, which is set out in article 63 of the CIRC, which establishes
the following, as amended in 2016:
Transfer pricing
1 - In commercial transactions,
including, namely, transactions or series of transactions on goods, rights or
services, as well as in financial transactions, carried out between a taxable
person and any other entity, subject to IRC or not, with which it is in a
situation of special relations, terms or conditions substantially identical to those
that would normally be contracted, accepted and practiced between independent entities
in comparable transactions shall be contracted, accepted and practiced.
2 - The taxpayer shall, for the purposes of determining the terms and conditions that would normally be agreed, accepted or practised between independent entities, adopt the method or methods that ensure the highest degree of comparability between the transactions or series of transactions that it carries out and other transactions that are substantially the same, in normal market situations or in the absence of special relations, taking into account, in particular, the characteristics of the goods, rights or services, the market position, the economic and financial situation, the business strategy and other characteristics of the taxable persons involved, the functions performed by them, the assets used and the allocation of risk.
3 - The methods used should be:
a)
The
comparable market price method, the resale-minus method or the cost-plus method;
b)
The
fractional profit method, the net operating margin method or another method,
when the methods referred to in the previous sub- paragraph cannot be applied
or, when they can be applied, do not provide the most reliable measure of the
terms and conditions that independent entities would normally agree, accept or practice.
4 - Special relations between two
entities are considered to exist in situations in which one has the power to directly
or indirectly exercise significant influence over the management decisions of the
other:
a)
an
entity and the holders of its capital, or their spouses, ascendants or descendants,
who have, directly or indirectly, a holding of not less than 20% of the capital
or of the voting rights;
b)
Entities
in which the same holders of the capital, their spouses, ascendants or
descendants hold, directly or indirectly, a holding of not less than 20% of the
capital or of the voting rights;
c)
an
entity and the members of its governing bodies, or any administrative,
management or supervisory bodies, and their spouses, ascendants and
descendants;
d) Entities in which the majority of the members of the corporate bodies, or of the members of any of the administrative, management, managerial or supervisory bodies, are the same persons or, being different persons, are related by marriage, legally recognised partnership or kinship in a direct line;
e)
Entities
linked by a subordination or parity group contract or other contract of
equivalent effect;
f)
Companies
in a relationship of control, under the terms of article 486 of the Commercial
Companies Code;
g)
Entities
whose legal relationship makes it possible, due to its terms and conditions, for
one of them to condition the management decisions of the other, according to
facts or circumstances unconnected with the commercial or professional
relationship itself;
h)
A
resident or non-resident entity with a permanent establishment located in
Portuguese territory and an entity subject to a clearly more favourable tax regime resident in a country, territory or region
included in the list approved by administrative ruling of the Government member
responsible for the area of finance.
5 - For the purpose of calculating
the percentage level of indirect holding in the capital or in the voting rights
referred to in the previous number, in situations where no special rules have
been defined, the criteria set out in Article 483.2 of the Companies Code shall
apply.
6 - The taxable person shall keep
organized, in the manner laid down for the tax documentation file referred to
in Article 130, the documentation on the transfer pricing policy adopted,
including guidelines or instructions relating to its application, contracts and
other legal acts concluded with entities with which he has a special relationship.The taxpayer shall keep organized, in accordance
with the tax documentation file referred to in Article 130, the documentation
on the transfer pricing policy adopted, including guidelines or instructions relating
to its application, contracts and other legal acts concluded with entities with
which it has a special relationship, with any amendments thereto and
information on their compliance, the documentation and information relating to those
entities and also to the companies and to the
analyses and the sectoral data and other information and elements that it has taken into consideration for the determination of the terms and conditions commonly agreed, accepted or practised between independent entities and for the selection of the method or methods used.
7 - The taxpayer shall indicate, in
the annual statement of accounting and tax information referred to in Article 121,
the existence or non-existence, during the tax period to which it relates, of
transactions with entities with which he is in a situation of special
relations, and shall also, in the case of declaring their existence:
a) Identify the entities concerned;
b)
Identify
and declare the amount of the operations carried out with each one;
c)
State
whether it has organized, at the time the operations took place, and maintains,
the documentation related to the transfer prices practiced.
8 - Whenever the rules set out in
subsection 1 are not observed, in relation to transactions with non-resident entities,
the taxpayer shall, in the return referred to in Article 120, make the necessary
positive adjustments in the determination of the taxable profit, for the amount
corresponding to the tax effects imputable to that non-compliance.
9 - The rules provided for in this Article shall also apply
in relations between:
d)
A
non-resident entity and its permanent establishment located in the Portuguese territory,
or between this and other permanent establishments located outside this territory;
e)
A
resident entity and its permanent establishments located outside the Portuguese
territory or between them.
10 - The provisions of the preceding
numbers shall also apply to persons who simultaneously perform activities
subject and not subject to the general CIT regime.
11 - When the Tax and Customs Authority
makes corrections necessary for the determination of the taxable profit by
virtue of special relations with another taxpayer subject to IRC or IRS, in the
determination of the taxable profit of the latter, the appropriate adjustments reflecting
the corrections made in the determination of the taxable profit of the former shall
be made.
12 - The Tax and Customs Authority may
also make the correlative adjustment referred to in the previous number when this
results from international conventions entered into by Portugal and under the terms
and conditions provided for therein.
13 - The application of transfer pricing
methods, either to individual operations or to series of operations, the type, nature
and content of the documentation referred to in paragraph 6 and the procedures
applicable to correlative adjustments shall be regulated by an Executive Order of
the member of the Government responsible for the area of finance.
It is not a matter of controversy that the operations
subject to adjustment based on transfer prices had as intervening parties entities
in a situation of special relations, in accordance with the concept defined in
article 63(4) of the CIRC and therefore are covered by article 63(1) of the
CIRC. Therefore, they are covered by the provisions of article 63, no. 1 of the
CIRC, which enshrines the arm's length principle,
and by Ministerial Order no. 1446- C/2001, of 21 December, issued in the wake
of the guidelines or directives that have been adopted by the OECD.
The operations carried out in situations where there
are special relations must observe the market conditions, in a free competition
situation, and the taxpayer or, if he does not do it, the Tax and Customs
Authority must correct the taxable amount, with an increase or decrease, according
to the divergence between the prices practiced and the prices practiced between
independent entities (articles 77, no. 3 of the LGT and 63 of the IRC Code).
In line with the OECD guidelines, Ministerial Order no.
1446-C/2001, of 21 December, densified the determination methods and
comparability factors to be considered for the purposes of ascertain any
divergence between the prices charged and the prices of free competition, establishing,
as far as it is concerned, the following:
Article 4 Determination of the most appropriate method
1 - The taxable person shall adopt,
in determining the terms and conditions that would normally be agreed, accepted
or practised between independent entities, the method
most appropriate to each transaction or series of transactions, taking into account
the following:
a)
The
comparable market price method, the resale-minus method or the cost- plus method;
b)
The
fractioning of profits method, the net margin method of the operation or another
method appropriate to the facts and the specific circumstances of each operation
that satisfies the principle set forth in paragraph 1 of Article
1 of this ordinance, when the methods referred to in the preceding subparagraph cannot be applied or, if they can be applied, do not allow obtaining the most reliable measure of the terms and conditions that independent entities would normally agree, accept or practice.
2 - The most appropriate method for each transaction or series of transactions is considered to be the one that is capable of providing the best and most reliable estimate of the terms and conditions that would normally be agreed, accepted or practised in an arm's length situation number of adjustments to remove differences in comparable facts and situations.
3 - Two transactions meet the
conditions to be considered comparable if they are substantially identical, meaning
that their relevant economic and financial characteristics are similar or
sufficiently similar, so that the differences existing between the transactions
or between the companies involved are not likely to significantly affect the
terms and conditions that would be practiced in a normal market situation or, if
they are, the necessary adjustments can be made to eliminate the relevant effects
caused by the differences verified.
4 - Where there are reasonable doubts
as to the reliability of the figures that would be obtained by applying a
particular method, the taxable person shall seek to confirm the figures by applying
other methods, separately or in combination.
5 - If, in the application of a
method, the use of two or more comparable unrelated transactions or the application
of more than one method deemed equally appropriate leads to a range of values that
ensures a reasonable degree of comparability, no adjustment need be made if the
relevant conditions of the related transaction, in particular the price or profit
margin, fall within that range.
For the purposes of the previous article, the degree of comparability between a tied and an untied transaction shall be assessed, taking into account, inter alia, the following factors:
a) The specific characteristics of the goods, rights or services which, being the subject of each transaction, are capable of influencing the price of the transactions, in particular the physical characteristics, quality,quantity, reliability, availability and volume of supply of the goods, the form of negotiation, the type, duration, degree of protection and the benefits anticipated from the use of the right and the nature and extent of the services;
b)
The
functions performed by the entities involved in the operations, taking into consideration
the assets used and risks assumed;
c)
The
contractual terms and conditions that explicitly or implicitly define how responsibilities,
risks and profits are shared between the parties involved in the transaction;
d)
the economic
circumstances prevailing in the markets in which the respective parties
operate, including their geographical location and size, the cost of labour and capital in the markets, the competitive position
of buyers and sellers, the stage of the supply chain, the existence of
substitute goods and services, the level of supply and demand and the general development
of the markets;
e)
The
strategy of the companies, contemplating, among aspects that may influence
their operation and normal conduct, the pursuit of research and development
activities for new products, the degree of diversification of the activity,
risk control, schemes for market penetration or maintenance or reinforcement of
market share, as well as the life cycles of products or rights;
f)
Other
relevant characteristics about the operation concerned or the companies involved.
1 - The adoption of the comparable
market price method requires the highest degree of comparability regarding both
the object and other terms and conditions of the transaction and the functional
analysis of the intervening entities.
2
- This method can
be used, inter alia, in the following situations:
a)
Where
the taxable person or an entity belonging to the same group carries out a
transaction of the same nature having as its object an identical or similar
service or product, in like quantity or value, and on substantially identical
terms and conditions, with an independent entity in the same or similar markets;
b)
When an
independent entity carries out a transaction of the same nature having as its object
an identical or similar service or product, in like quantity or value, and on
substantially identical terms and conditions, in the same or similar markets.
3 - Where a linked and an unlinked
transaction are not substantially comparable, the taxpayer shall identify and
quantify the effects caused by transfer pricing differences, which shall be of a
secondary nature, and make the necessary adjustments to eliminate those
differences in order to arrive at an adjusted price corresponding to that of a
comparable unlinked transaction.
Therefore, a first assumption of the application of
the transfer pricing regime by the Tax and Customs Authority is to ascertain
whether conditions substantially different from those that would normally be
agreed between independent entities have been established, which have led to
the determination of a taxable amount different from that which would be determined
in the absence of such relations.
If it is concluded that such substantially different
conditions have been established, the arm's length price should be determined in
accordance with the methodology developed within the OECD and received by the
mentioned Ministerial Order.
In the light of these rules and of article 63(2) of
the CIRC, it is fundamental that the compared and comparable situations share identical
properties or "factors of comparability", or in case of partial
comparability, that it is feasible to make the necessary adjustments to ensure comparability
(2 ).
Firstly, it should be noted that tax arbitration
proceedings, as an alternative to judicial review proceedings (Article 124(2)
of Law 3-B/2010 of 28 April), are, like the latter, a procedural means of mere
legality, in which the aim is to eliminate the effects produced by illegal
acts, annulling them or declaring their nullity or non-existence [Articles 2 of
the RJAT and 99 and 124 of the CPPT, applicable by virtue of Article 29(1)(a)
of the RJAT].Therefore, the acts must be assessed as they were performed.
Therefore, it is not in question to assess whether the application by the
Claimant of the transfer pricing regime was correct or not, but to determine
whether the corrections made by the Tax and Customs Authority have legal support.
And, as this is the subject of the proceeding, it is
consolidated case-law that it is up to the Tax and Customs Authority to prove the
assumptions on which the transfer price adjustments are based, a burden that
covers the identification and proof of special relations, of the "terms under which operations of the same nature
normally take place between independent persons and under identical
circumstances" in order to demonstrate that the price charged is not
the market price, and which is the applicable market price, describing and quantifying
the effective amount that served as the basis for the adjustment (3 ).
Naturally, with the proviso that this is not an exact science, so that the
quantitative aspects are reached in an approximate manner, within reasonable
intervals.
For this purpose, the referred rules impose the
adoption of a price determination method (of the market) capable of assuring
the highest degree of comparability between the operations, and establish that
taxpayers must follow one of three methods (the comparable market price method,
the resale price method or the cost plus method), or, in its impossibility or insufficiency,
other methods (namely the split profit method or the net operating margin method,
as provided for in Article 63(3)(a) and (b) of the CIRC).
With regard to comparability, Article 4, this means
that
their relevant economic and financial characteristics
are similar or sufficiently similar, so that the differences
existing between the operations or between the companies involved in them are not
likely to significantly affect the terms and conditions that would be practised in a normal market situation or, if they are, the
necessary adjustments can be made to eliminate the relevant effects caused by
the differences verified".
The functions performed by the entities involved in the
operations, taking into consideration the assets used and the risks assumed,
the contractual terms and conditions, the economic circumstances of the
entities and the strategy of the companies are relevant for comparability purposes
(these and other comparability factors are listed in article 5 of Ministerial Order
no. 1446-C/2001).
In the case at issue, the Tax and Customs Authority
made corrections by applying the Comparable Market Price Method (MPCM), which
is the one that "requires the
highest degree of comparability with incidence on both the object and other terms
and conditions of the transaction and on the functional analysis of the
intervening entities" (Article 6(a) of Ministerial Order 1446-C/2001).
Evidence showed that there are clear differences
between the relevant circumstances for the formation of the prices that the Tax
and Customs Authority used as comparable and those that were relevant for the
formation of the prices charged by the Claimant with its related companies L...
Limited and K... SRAL.
In fact, from the outset, the prices charged by the
Claimant with those related companies are CIF prices (Cost, Insurance and
Freight), with delivery at the port of destination and the corresponding risks until
that moment, and the prices charged with unrelated companies are, as a rule,
DAP prices (Delivered at Place), which implies that the Claimant, in addition
to having to bear the costs of land transport, must clear customs and bear the
risks involved in their transport to the customers' premises, not located in the
ports of destination.
The
Inspector herself, Ms. S... acknowledged that she did not verify if the prices charged
with the unrelated companies were or not CIF prices [paragraph OO) of the established
factual matter], which implies a deficiency in the investigation of the
relevant facts for the transfer pricing adjustment, which, by itself,
constitutes a violation of the inquisitorial principle, which is invoked by the
Claimant, since this principle requires that the Tax and Customs Authority
performs in the tax procedure all necessary steps for the discovery of the material
truth (article 58. The violation of this principle by the Tax and Customs
Authority is corroborated by the fact, mentioned by the Inspector, that the
Claimant submitted all the documents that were requested by the tax inspection
services [paragraph MM) of the established facts], which allows to rule out the
imputation of the omission to establish these facts to the Claimant's actions.
On the other hand, the quantities sold by the Claimant to related companies are
also much larger than those sold to any other company in the respective
regions, which implies that different quantity discounts must be included in the
formation of prices. Indeed, sales to L........................................................................... UK
represented, in 2016, 63% of the sales of electrowelded
mesh in the UK market and the Claimant's sales to K....................................................................................................................... France,
in the year 2016, accounted for 60% of electrowelded mesh
sales in the French market.
The quantities sold and the sales conditions, namely
the size of the risks assumed, are factors of comparability with obvious relevance
in influencing prices, and are expressly indicated in paragraphs a) ("quantities") and b) ("risks assumed") of article 5 and in
paragraphs a) and b) of no. 2 of article 6 (analogous quantity) of Ministerial
Order no. 1446- C/2001.
Therefore, it must be concluded that the setting of transfer
prices, which did not take into account such factors that could influence prices,
is vitiated by a violation of law, due to an error on the assumptions of law,
namely of the rules of paragraph a), of no. 3 of article 63 of the CIRC, as well
as paragraph a), of no. 1, 2 and 3 of article 4, 5 and 6 of Ministerial Order 1446-C/2001,
of 21 December, invoked by the Claimant.
In addition to this defect of breach of law, the
assessment is also vitiated by a breach of the principle of inquisitorial nature,
set out in Article 58 of the LGT.
These defects justify the annulment of the assessment in
the part concerning the corrections based on the transfer pricing regime, under
the terms of Article 163(1) of the Administrative Procedure Code, subsidiarily applicable
pursuant to Article 2(c) of the LGT.
On 04-02-2021, the Applicant provided the bank
guarantee to suspend the tax execution proceedings No. ...2021..., filed for
enforced collection of the amount assessed and claims for compensation, pursuant
to Article 53 of the LGT.
Article 171 of the CPPT establishes that "compensation
in case of unduly provided bank guarantee or equivalent shall be requested in
the proceedings in which the legality of the enforced debt is disputed" and that
"the compensation must be requested in the
complaint, appeal or in case its basis is supervening within 30 days after its
occurrence".
Thus, it is unequivocal that the judicial review
procedure encompasses the possibility of ordering the payment of undue
guarantee and is even, in principle, the appropriate procedural means for making
such a request, which is justified for obvious reasons of procedural economy,
since the right to compensation for undue guarantee depends on what is decided
on the legality or illegality of the assessment act.
The corollary of the request for the creation of an arbitral
tribunal and for an arbitral award is that the "legality of the enforced debt"
will be discussed in the arbitral proceedings. As a result, as is clear from
the express wording of Article 171(1) of the CPPT, the arbitral proceedings are also the
appropriate forum to assess the claim for compensation for undue guarantee. The
regime of the right to compensation for undue guarantee is set out in article 53
of the LGT, which reads as follows:
Guarantee in case of undue payment
1. A debtor who, in order to stay
execution, offers a bank guarantee or an equivalent shall be compensated for
all or part of the losses resulting from its provision, if it has maintained it
for a period of more than three years in proportion to the maturity in administrative
appeals, challenges or oppositions to execution aimed at the guaranteed debt.
2. The time limit referred to in the
previous subsection shall not apply when an administrative or judicial
complaint verifies that there was an error imputable to the services in the
assessment of the tax.
3. The indemnity referred to in
paragraph 1 above has a maximum limit of the amount resulting from the
application to the guaranteed value of the indemnity interest rate provided for
in the present law and may be requested in the claim or judicial review process
itself, or autonomously.
4. Compensation for undue guarantee
shall be paid by deduction from the tax revenue of the year in which the payment
was made.
In the present case, it is clear that the errors
underlying the contested assessments, in the parts that are contested, are
attributable to the Tax and Customs Authority, as they were of its own initiative
and the Applicant in no way contributed to those errors.
Therefore, the Claimant
is entitled to compensation for the guarantee provided.
As there are no elements to determine the exact amount
of compensation, the condemnation will have to be made with reference to that which
will be liquidated in execution of the present decision, in harmony with that provided
for in Article 609, no. 2 of the Code of Civil Procedure, applicable
subsidiarily by virtue of the provisions of Article 29, no. 1, paragraph e) of the
RJAT.
Accordingly, it is hereby agreed
by this Arbitral Tribunal that:
A)
Uphold the request for arbitration;
B)
Partially annul, in the parts
corresponding to the contested corrections regarding financing costs, exchange
rate differences and transfer pricing, the corporate income tax assessment for 2016,
with no. 2020 ..., and the respective compensatory interest assessments no. 2020
..., 2020 ... and 2020
..., as well as
the respective statement of account adjustment no. 2020 ...;
C)
Uphold the claim for damages for undue
guarantee and order the Autoridade Tributária e Aduaneira to pay the
applicant the damages to be liquidated in execution of the present judgment.
In accordance with the provisions of Articles 306, no.
1 of the CPC and 97-A, no. 1, paragraph a), of the Code of Tax Procedure and
Proceedings and 3, no. 2, of the Regulation of €
1,202,465.86.
Pursuant to Article 22(4) of the RJAT, the amount of
costs is set at €16,524.00, in accordance
with Table I attached to the Regulation on Costs in Tax Arbitration Proceedings,
to be borne by the Tax and Customs Authority.
Lisbon,
07-12-2021
The Referees
(Jorge Lopes de Sousa)
(Martins Alfaro)
(João Marques Pinto)