Case No. 213/2021-T
Date of the decision: 2022-03-23 IRC
ARBITRATION DECISION
I - REPORT
1. Claimant
A..., SA, with registered office at ... ..., ...-..., ... . With tax
identification number ... .
2. Defendant
Autoridade Tributária
e Aduaneira (AT) represented by Dr. ... and Dr. ... .
3. Proceedings and
constitution of the Arbitral Tribunal
3. The Claimant's request
for an arbitration award was filed on 14 April 2021 and accepted by CAAD on the
following day.
3. The Respondent appointed
Dr. Nuno Maldonado Sousa as arbitrator.
3. The Claimant appointed
Dr. Francisco Carvalho Furtado as arbitrator.
3. The President of the
Ethics Committee of CAAD appointed Mr. Manuel Macaísta
Malheiros as President Arbitrator. The Court was
constituted by order of 9 August 2021.
3. On 23 September 2021 the
AT requested an extension of the deadline to present its reply for a further 30
days, and this request was accepted on the same day.
3. The Respondent submitted
its response and attached the S.A. on 20 October 2021.
3. On 15 November 2021, the
Claimant requested the addition of a witness to the list of witnesses previously
submitted.
3. The examination of the
witnesses took place on 17 November 2021.
3. The Claimant presented
written statements on 3 December 2021 and the Defendant on 22 December 2021.
3. On 3 February 2022, the
Court extended the time limit for delivery of the decision by two months, as
from 9 of that month.
II - THE REQUEST
The Applicant requests the appraisal of the legality, with the legal
consequences, of the following assessments:
a. of Corporate Income Tax, with no. 2020..., regarding the year 2017,
which adjusted the taxable amount in €155,814.99;
b. of VAT, with no. 2020..., relative to the year 2018, according to
which the tax payable was calculated in the amount of €6,900.00.
III - POSITION OF THE PARTIES
1. The Applicant
The Applicant is a public limited company incorporated on 24 November
2014, whose corporate purpose is the implementation and development of energy
efficiency projects, including the supply and replacement of luminaires for LED
system, entering into energy efficiency contracts with municipalities for the
implementation of measures to improve energy efficiency in public lighting.
The Applicant is 51% owned by B... SA, based in Portugal, and 49% by the
C... (C...), a venture
capital investment company, managed by D... - Sociedade Gestora de Fundos de
Capital de Risco, SA.
On 26 November 2014 and 2 December 2015, the Plaintiff took out loans
from B..., in the amount of €61,716.00 each year, and from C... in the amount
of €450,000.00, also each year, all contracted with reference to an initial
contractual maturity of no less than 1 year, with the expected repayment of the
capital only on maturity and without any associated guarantees.
The parties established that the loans would bear interest annually at
the rate of 3.22xEuribor 12 months, plus a spread of 14%.
In 2017, the year on which the inspection action made by the Respondent
was focused, concerning corporate income tax and VAT, the effective interest
rate borne by the Claimant as a result of the shareholder loans was 13.73%.
The AT asked the Claimant to explain the criteria for having chosen a
spread of 14%. The Claimant answered that the context of the Claimant's
creation was taken into account, as well as the flexible characteristics of the
instrument.
On non-deductible charges due to the interest rate
The Respondent considered that the Claimant should have kept in the
organized tax file (in accordance with the obligation provided for in article
63(6) of the CIRC) the documentation regarding the adopted transfer pricing
policy.
The Claimant contends that it is not required to submit such documentation,
since article 13, no. 3 of Ministerial Order no. 1446-C/2001, of 21 December,
determines that taxpayers that in the previous fiscal year have reached an
annual value of net sales and other income lower than €3,000,000.00 are exempt
from this obligation. In 2016, the income of the Claimant was €1,313.94 and the
inspection referred to the year 2017.
The AT considered that the costs with interest were not deductible due
to the fact that article 23-A no. 1 m) of the CIRC refers to article 63 of the
same law, for which reason they analyzed the remuneration of the shareholder
loans according to the comparable market price method, and the AT chose as
reference for the analysis of the financing the loan agreement entered into on
9/5/2016 between E... and B... . This is because in July 2017 the Claimant
succeeded B... in that financing contract.
The AT did not accept the imputation of expenses arising from that
contract to the Claimant because, on the one hand, although B... granted loans
to the Claimant, it debits interest to it, so the deduction would be a
duplication of expenses and, on the other hand, because the bank expenses,
although accounted for in 2017, concerned the financial year 2016.
As to the rendering of services by D..., the AT considered that there is
no document proving its performance, while the Claimant contends that such
services were effectively rendered, because the Claimant does not have any
employees.
Also regarding the transfer pricing analysis, the Claimant emphasizes
that it is necessary to take into account the circumstances in which the facts
occurred, which the AT did not do.
Thus, the Claimant proceeds to the circumstantial framework, saying that
at the date of the contracting of the shareholder loans (2014,2015), it was
still in the start-up phase of its activity, which implied the existence of
investments so that there could be returns in the future. In other words, in
the initial phase there is a cash flow imbalance, which requires the use of
compensatory financing.
The Applicant then invokes the financial crisis experienced in Portugal
since 2011, which involved the intervention of the so-called troika, whose
policy resulted in enormous difficulty for the business fabric to finance
itself with the banks. However, as the Claimant was incorporated in 2014, it
did not at all meet the demanding banking criteria for the granting of credit.
In this context, the shareholders of the Claimant had to finance it,
obviously without guarantees, as the Claimant could not provide them. Therefore
the loans granted were contracted to be repaid only at the end of the maturity
of the contract.
Adds the Claimant that "The risk of default is closely related to
the debtor's inability to obtain the necessary funds to meet its liabilities on
the due dates. And this risk is greater the more junior the instrument in
question, that is, the less priority the instrument is in terms of channelling available liquidity for repayment.
In addition, under the terms of Article 245 (2) of the Companies Code,
shareholders' loans creditors cannot file for bankruptcy of the company on
account of those credits. And no. 3 of the same article determines that the
reimbursement of shareholders' loans can only take place after all the other
debts of the company have been paid.
However, the AT opted to assess the financing costs under the arm's
length principle based on the MPCM. And pursuant to no. 2 of article 6 of
Ministerial Order no. 1446-C/2001, of 21 December, which regulates the
application of this method, it opted to make the comparison with the loan
agreement entered into in 2016 by B... with E... .
The AT, in the RIT, does not present any analysis of the comparability
of that loan agreement with the loans under analysis in the case records. In
the first case, the spread was 3%, while in the second it was 14%. This means
that the AT did not observe the highest levels of comparability required by
law, namely by article 63(2) of the CIRC and by article 6(1) of the Ministerial
Order.
And, in its reply, the AT seems to convey the understanding that
"[although the preamble of the abovementioned Ministerial Order clarifies
that "this rule [Article 23-A(1)(m) of the CIT Code] does not apply to
situations to which the transfer pricing regime provided for in Article 63 of
the CIT Code is applicable, the prevailing interpretation is that the transfer
pricing regime does not apply to situations in which the transfer pricing
regime provided for in Article 23-A(1)(m) of the CIT Code is applicable. In
such cases, the terms and conditions that would be normally contracted,
accepted and practiced between independent entities in comparable
operations", practiced in the market" and not the rates practiced in
issues of debt instruments" cannot however fail to draw consequences from
the indication given by the legislator that the benchmark for the establishment
of the limits are the "interest rates on loans to companies".
Now, the Claimant says that not only does the referred rule "not
apply to situations to which the transfer pricing regime is applicable",
but, even if it did apply, neither the letter of the law, nor any
interpretation of it that, even if daring, would have a minimum of
correspondence in the positive text, would result in the imposition of
considering interest rates usually applied in the banking market.
The Claimant also adds that the same degree of comparability is required
by paragraph 2.15 of the OECD Guidelines and that the Preamble of the
Ministerial Order itself advises, in more complex cases, to "consult the
OECD reports that develop this matter", so that the OECD Guidelines
operate as supporting elements of the interpretation of the national rules on
transfer pricing.
And that, similarly to the OECD Guidelines, Article 5 of Ministerial
Order 1446-C/2001, determines that the comparability degree must be assessed,
among other factors, based on the "functions performed by the entities
involved in the operations, taking into consideration (?) the risks assumed
" (al. b)) and "the contractual terms and conditions that define,
explicitly or implicitly, the way in which (...) the risks are shared between
the parties involved in the operation" (al.c)).
As it is known, the basic economic principle of these contracts is that
remuneration reflects the risk assumed (see §1.51 and §1.56 of the OECD
Guidelines).
The Claimant concludes that the AT, in applying the MPCM, by choosing
the loan contract concluded between B... and E..., violated the law. To
reinforce this assertion, the Claimant invokes Decisions taken within CAAD, in
the following cases: no. 162/2018-T; no. 384/2018-T; no. 253/2019-T.
The AT argues that in the F... study, the entities intervening in the transactions
considered as comparable were not "subject to functional, financial,
activity and market characterization in which they operate"
Article 4(3) of Ministerial Order 1446-C/2001, of 21 December, states
that "[t]wo transactions meet the conditions to be considered comparable
if they are substantially identical, which means 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". In other words, according to
article 4 (3) of the referred Ministerial Order, the comparability between
transactions depends on a substantial identity, which presupposes an analogy or
similarity between the relevant economic and financial characteristics and that
there are no differences capable of significantly affecting the terms and
conditions that would be practiced in normal market conditions.
It follows from Article 5 of the said Ministerial Order that the degree
of comparability must be assessed, among other factors, based on the
"functions performed by the entities involved in the transactions, taking
into consideration (...) the risks assumed" [paragraph b)] and on the
"contractual terms and conditions that define, explicitly or implicitly,
how the risks (...) are shared among the parties involved in the
transaction" [paragraph c)].
However, as mentioned above, the AT, in the Tax Inspection Report, did
not present any analysis of the existence of any comparability of this banking
transaction with the shareholder loans under analysis, nor does it effectively
state in the Tax Inspection Report the existence of this alleged comparability.
Although it is not possible to understand what led the AT to conclude on
the comparability between this credit and the transaction under analysis -
because it only claims the existence of such comparability, without ever
proving it -, it seems that such conclusion is not based on premises related to
the characteristics of those loans.
And neither could it, since the credit risk in the loan agreement is
that of B..., while in the supply, it is that of the Applicant. Therefore it cannot be accepted that, being,
as already mentioned, the credit risk the determining factor in fixing the
interest rate and having the transactions substantially different credit risks,
they are considered as sufficiently comparable.
In addition, Article 6(1) of Ministerial Order 1446-C/2001 of 21
December provides that "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 transaction and on the functional analysis
of the entities intervening". In
other words, the application of the method selected by the AT required, under
the law, the prior performance of a comparability analysis, that is, the
verification that the internal benchmark selected - the bank loan agreement -
was comparable to the shareholder loans under analysis, and the AT did not
perform this prior verification required by law in the application of the
MPCM. Therefore, it must be concluded
that the correction made by the AT through the application of the MPCM did not
follow the procedures required by the law, contaminating the subsequent tax
act.
However, it is easy to see why the Tax Authorities have not presented
any analysis of comparability of the bank loan agreement with the shareholder
loans in question, since the performance of such analysis could only conclude
that the loan agreement does not meet sufficient comparability conditions to be
used as reference in the application of the MPCM. It should be remembered that
under the terms of Article 6(1) of Ministerial Order 1446-C/2001, of 21
December, "[t]he 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 transaction and on the functional analysis of the
intervening entities" .
In fact, it can easily be seen that with the exception of the (variable)
interest rate and the currency contracted both in the shareholder loans and in
the loan agreement (Euro), none of the other comparability factors that could
be considered for the purposes of this analysis were taken into account by the
AT, thus calling into question the benchmark considered as adequate for the
correction made by the AT.
The main aspect that should be highlighted is that the shareholder loans
were contracted in a different economic conjuncture from the bank loan
contract, also implying different conjunctures in the way the financial
operations were remunerated, in the same way as the maturities of the
shareholder loans granted by the shareholders are substantially different from
the maturity contracted in the bank loan used by AT as a benchmark to correct
the shareholder loans.
It should also be noted that the AT considered comparable an operation
whose periodisation of capital repayments is
completely different from the periodisation
considered in the structuring of the shareholder loans under analysis, which
inevitably incorporates a different risk for the creditor entities.
In fact, a loan whose repayment
is fully concentrated on the maturity of the contract, and without any
provision for interim payments throughout, necessarily carries a higher risk,
compared to a loan whose repayment is made periodically throughout the
contracted period, as is the case of the bank loan agreed with E..., i.e. for
which the creditor recovers part of the borrowed capital, thus reducing its
exposure to the risk of the debtor and its activity.
In this regard, the understanding pronounced in Case No. 733/2015-T is
lapidary. No. 733/2015-T, in which CAAD considered that "[i]n truth, as regards the condition associated to the
comparability of the "contractual terms and conditions that define,
explicitly or implicitly, the manner in which (...) the risks are shared (...)
between the parties involved in the transaction". ) between the parties
involved in the transaction", the same cannot be considered to be
verified, since between shareholder loans and bank financing there is a
dissimilarity in what concerns the creditor's degree of protection, since in
the first case, the creditor does not have any special guarantee and its credit
is subordinated to all the other credits of the bank financing and in the
second case, on the contrary, it has in its hands a set of specific guarantees
and the credit involved is senior".
Economic study on transfer pricing conducted by the Claimant
The Claimant conducted an economic study of transfer pricing, based on
public information available in Bloomberg database, which has a high
recognition in the market for the analysis of financing transactions.
Through the use of the Bloomberg database, it is possible to obtain
"the highest degree of comparability" foreseen in Article 6(1) of
Ministerial Order no. 1446-C/2001, of December 21, since this database allows
the individual application of each of these criteria in order to obtain
transactions sufficiently comparable to the shareholder loans under analysis.
The economic analysis performed by the Claimant is composed of two
components, aiming to cover the periods of 2014 and 2015 (separately), in order
to assess the remuneration range applicable to each shareholder loan. However,
from the fact that said analysis is "focused on data reported not to 2017,
but to 2014 and 2015", the AT draws the conclusion that it does not
corroborate that the interest rate practiced complies with the transfer pricing
rules, and is therefore irrelevant.
However, such reasoning lacks any logical support and ignores the
national and international rules that guide the performance of transfer pricing
studies. If the purpose is to understand whether in a given transaction between
related parties, "the terms and conditions that were in force in the
market between independent parties in a similar transaction" were applied,
it will be necessary to use data that allow to determine what those terms and
conditions were, i.e. data that more reliably reflect the characteristics of
contemporary transactions of the one under analysis.
In short, in the case sub judice, it was therefore important to find out
what "the terms and conditions that were in force in the market between
independent parties in a similar transaction" in 2014 and 2015 and not in
2017 - as wrongly understood by the AT. Therefore, and as paradoxical as it may
seem, if the Claimant had adopted the AT's understanding that, in this case,
the data should refer to 2017, it would have presented a study that was not
suitable for the intended purpose and that the AT could, justifiably,
completely devalue.
Contrary to what the AT claims, the validity of the study is not
affected by the fact that the search for comparable data was "made not in
a national database (...), but in an international database" and in no way
affects the relevance of the conclusions that "the observations identified
as comparable" were not "contracted in Portugal" (cf. article
100 of the Response). Conclusion that is based on two premises: (i) the (few) public financial transactions carried out in
Portugal were not sufficiently comparable and (ii) the international database
used in the study presented by the Claimant - Bloomberg -, is one of the most
reputable and used.
But it should be noted that internal transactions were first analyzed,
and only after concluding that they "were not comparable" was F...
"search for external comparables".
It was only selected as comparable transactions contracted in the same
contracting period of the shareholder loans under analysis, by entities that
develop activities comparable to the activity developed by the Claimant, in a
comparable region, in the same currency, with similar maturities and amounts,
not guaranteed - as is the case of the transactions under analysis.
In order to guarantee "the highest degree of comparability"
mentioned in article 6(1) of Ministerial Order no. 1446-C/2001, of 21 December,
regarding the entities intervening in the operations considered as comparable,
a complementary analysis was carried out focusing on the jurisdiction where the
operations selected as comparable were issued, as some of the operations
identified were issued in European countries whose macroeconomic environment is
different from the Portuguese, a circumstance that impacts the remuneration
required by underwriters. In fact, the observations identified include entities
issued in one of the following countries: Austria, Italy, Luxembourg, Poland
and Czech Republic.
Considering the financial and sovereign debt crisis environment that
affected in the recent past (including the years 2014 and 2015) the Portuguese
economy as well as that of other European countries, the implicit risk
associated with a given country has a relevant impact on the remuneration of
financial operations, which explains why, for example, a German debtor can get
financing at more favourable rates than a Portuguese
debtor with similar risk and credit profile. This impact is particularly
relevant in markets such as Portugal's, which show less convergence with the
markets of central European economies.
It was not possible to circumvent this factor by identifying Portuguese
comparable operations, given that the performance of the national economy and
the difficult financial situation of the country and Portuguese financial
institutions, particularly in the years between 2011 and 2015, originated a
reduction in available liquidity and the application of more demanding criteria
in the granting of loans, which led to a significant reduction in the number of
credit operations granted to local economic agents, and consequently a
proportional reduction in the universe of potential domestic comparable operations.
In order to correct the differential between the Portuguese financial
reality and the reality of the markets of the issuers of the operations
selected as the best comparables (and thus increase comparability between these
operations and the intra-group shareholder loans under analysis), an adjustment
was made to the comparable operations, in accordance with the provisions of
paragraph 3 of Article 6 of Ministerial Order 1446-C/2001, of 21 December, to
reflect the differential between the country risk of the country of issue of
each comparable operation and the country risk associated with Portugal.
According to economic theories commonly accepted in international
financial markets, the risk premium of a country reflects the increased return
that an investor would demand by investing in that country, and is an indicator
of the risk that the market perceives to be associated with a given country. In
this way, the higher the risk premium, the riskier the investment in that
country and, consequently, the higher the remuneration required by the investor
in the previous phase of evaluation of the investment project or application of
funds. For this purpose, the Claimant
used a public database to extract the risk premiums of the countries where the
comparable transactions were carried out.
In order to correct the risk differential of each country, the risk
premium of the country of issue of the borrower entity of each operation was
subtracted from the interest rate of each comparable operation and the risk
premium of Portugal was added. Thus, the effective interest rates of the
operations considered as the best comparable operations were adjusted so as to
reflect the financing risk differential between the issuing market and the
Portuguese market, in those operations.
However, the AT considers that "[t]he increase appears
inappropriate, bearing in mind that in 2017 there was no evidence that Portugal
- integrated in the Eurozone - was listed as a risk country for the financial
markets, which can only be explained by the need to achieve interest rates
close to those practiced in the shareholder loans".
The implementation of the necessary adjustments to reflect the risk of
Portugal in the operations in question led to the establishment of the
following arm's length interval for the market remuneration (interest rate) of
the shareholder loans under analysis:
Indicator Period Minimum 1st Quartile Median 3rd Quartile Maximum
Observations
Interest rate (%) 2014 7.13% 10.34% 12.45% 12.45% 16.17% 7
2015 8,59% 10,53% 13,03% 14,05% 15,86% 6
In view of the above, it is unequivocally demonstrated, using market
benchmarks with a higher degree of comparability than the information used by
AT for its correction, that the remuneration agreed in the context of related
parties was adequate and not excessive, contrary to what AT unduly claims.
In fact, the 13.73% rate practiced in the shareholder loans contracted
by the Claimant with its shareholders during the 2014 and 2015 periods is
within the market remuneration ranges agreed upon between independent entities
that carry out similar activities to those developed by the Claimant, in
operations of comparable nature and with similar characteristics, demonstrating
that it was not subject to correction by the AT.
On the non-acceptance of the deduction of bank expenses associated to
financing
In this arbitral action, the AT in its response did not make any
comments on the referred correction it made and, as well as, on the arguments
put forward by the Claimant.
However, what the AT stated in the RIT is incorrect in the legal
framework that it makes to the referred expenses. In fact, and first of all, it
should be remembered that we are facing a situation of re-invoicing of costs
borne by B..., under a financing that was subsequently transferred to the
Claimant's sphere. Such re-invoicing necessarily implies, in the light of the
rules of the Accounting Standardization System, that B... has treated this
situation in one of two ways: a) at the time the financial institution invoiced
the referred commissions, it recognized a credit over the Applicant, having
then eliminated this credit at the time it re-invoiced the commissions to the
Applicant; or b) it recognized a deductible expense at the time the financial
institution invoiced the referred commissions, but also recognized an income at
the time it re-invoiced these same expenses to the Applicant.
In both models of treatment of the expense, the same did not produce any
type of relevant tax effect for B..., to the extent that in the first case the
situation did not influence the accounting profit nor created a positive asset
variation in the sphere of B..., and in the second case the expense was
annulled by the profit. As such, it is erroneous the statement, devoid of any
factual basis, that there would be some kind of double use of these financial
expenses between the two entities (B... and the Applicant).
AT may be possibly questioning the deductibility of bank expenses
alleging double expenses with interest related to the same loan (it should be
noted that bank expenses are related to bank financing contracted with E... and
not with shareholder loans, contrary to what AT seems to claim, wrongly). If this is the case, which is not at all
clear from the reasoning adduced, it should be noted that it is the banking
institution itself that is simultaneously charging interest and bank charges,
as these result from a contract between independent parties.
It should be noted that the charging of interest and bank charges is common
in the allocation of loans and is intended to remunerate distinct functions
carried out by financial institutions, as can easily be verified by consulting
the public price lists of banks operating in Portugal. Interest is intended to
remunerate the granting and availability of funds, while bank expenses are
intended to remunerate administrative services provided by banks to the benefit
of the debtor in structuring the loan.
In this case, since the entity that effectively benefits from the bank
loan is the Applicant, it is natural that it is also the Applicant to bear the
bank expenses related to the same bank loan and that aim to remunerate the
financial institution for the functions performed in the structuring and
management of the financial instrument.
Finally, it should be recalled that the B... supply to the Claimant
subsisted after the assignment of the financing obtained with E..., so
insinuating that the interest charged under this supply could, somehow, already
reflect the costs incurred with the contracting of the financing with E..., has
no factual basis whatsoever, and, in any case, the proof of this situation
would be up to the AT under articles 74 and 75 of the General Tax Law
("LGT").
Under the terms of article 3(1)(a) and 3(2) of the CIT Code, this tax is
levied on the profit of commercial companies, and profit is deemed to be the
difference between the net assets at the end and beginning of the tax period,
with the corrections established in that Code. The said profit is calculated
based on the taxpayer's accounts (which the report acknowledges to be correctly
drawn up), pursuant to article 17 of the IRC Code, on the basis of the
taxpayer's income statement and variations in equity.
As the final report of the inspection recognizes, B... assigned to the
Claimant its position in the referred financing on July 4, 2017, being natural
that under the assignment, all charges incurred by B... in connection with the
referred financing contract, contracted to finance the Claimant's activity,
were also transferred to the Claimant.
In this context, it should be recalled that the accrual principle does
not have a total and absolute rigidity so as to lead to the penalization of the
taxpayer that did not cause any damage to the public treasury. Thus, since the Tax Inspection Services
disagree with the accounting made with reference to expenses of the 2017 fiscal
year, due to violation of the principle of specialisation:
(i) either correct the 2016 fiscal year, in which it
considers there should have been a correct recognition of costs, (ii) or
refrain from making a correction to the 2017 fiscal year, as unfair. What it
could not do was to simply disregard that negative component of the taxable
income, when there are no doubts as to its realization.
By adding to the taxable income, the Tax Inspection Services violated
article 55 of the LGT and article 266 of the Constitution of the Portuguese
Republic ("CRP").
The non-acceptance of the deduction of expenses associated to services
provided by D..
This correction implied not only an adjustment to the Taxable Income of
the Claimant in 2017, but also the alleged undue deduction of VAT in the amount
of €6,900.00, a deduction that influenced the VAT refund request made in the
second quarter of 2018.
The Claimant claims that the proof that the services were effectively
performed was up to the AT, which it failed to do, according to article 74(1)
of the LGT. The AT merely affirmed the material non-existence of the services.
As the party invoking the right - the AT - has not proved the facts
constituting that right, it must be concluded that the right invoked cannot be
granted, that is, the AT cannot refuse the deduction in crisis, because it has
not proved the underlying factuality.
It should be added that, in the legal-tax system, the principle in dubio contra fiscum is in force
and, in the event of doubt as to the taxable event, a decision favourable to the taxpayer should always prevail and never
against him. Article 100 of the CPPT is also in this sense.
The Claimant also argues that both the document 15 that was attached to
the ppa (e-mails exchanged with D...) and the
testimony given by G... prove the effective provision of services.
The Claimant adds that it should not be forgotten that the invoices
corresponding to the provision of such services were issued and the income
arising therefrom was taxed in the sphere of D.... which means that, when
issuing those invoices, the AT, unlike what is happening now, did not question
the materiality of the underlying transactions, that is, did not raise any
doubts regarding the effective provision of services.
If the services were considered to have been effectively provided when
the intention was to tax D... - which is not contested -, they will also have
to be so, now, for the purposes of deduction of the inherent expenses, failing
which the AT would incur in an abuse of right, in the form of venire contra
factum proprium.
And it should not be said, as the AT does in its Reply, that there has
been a reversal of the burden of proof as regards the provision of services, as
the AT has failed to do as it should "collect objective and reliable
evidence that the taxable amount declared by the taxpayer is not the real
one". Now, as the AT has not carried out this indicative evidence that the
transactions (in this case, the provision of services by D?) are not true, it
must be concluded that the presumption of truthfulness of the Applicant's
accounts (and the elements supporting it) is maintained in full, in the light
of article 75 of the LGT, so the argument put forward by the AT in this action
should be totally unfounded, as it has not met its burden of proof.
2. From the Respondent
The Respondent refutes the Claimant's position as follows:
Pursuant to paragraph m) of paragraph 1 of Article 23-A of the CIRC, the
following are not deductible for purposes of determining taxable income:
Interest and other forms of remuneration of shareholder loans and loans made by
the partners to the company, in the part that exceeds the rate defined by
ordinance of the member of the Government responsible for the area of finance,
except when the regime established in Article 63 applies. This rate was
published through Ordinance No. 279/2014, of 30 December.
In turn, article 63 of the CIRC provides for the transfer pricing
regime. Under paragraph 4(a) of the same article, special relations exist
between two entities when one entity and the holders of its capital, or their
spouses, ascendants or descendants, have, directly or indirectly, a holding of
not less than 20% of the capital or of the voting rights.
In this case, there are special relations between the shareholders and
A... and the regime established in article 63 of the Portuguese Securities Code
is applicable.
Under number 13 of this article, Ministerial Order no. 1446-C/2001, of
21st December was published, which regulates the transfer price regime.
Considering what is established in the referred rules regarding
operations carried out between entities with special relations, the Claimant
was notified to justify the criteria used in the determination of the spread of
14%, presenting the respective supporting documents.
By email dated 10-07-2020 the Claimant claimed, in sum, that the spread
in question was determined in market conditions, taking into account the
context of the company's creation and the flexible characteristics of the
instrument, specifically listing several reasons, but making no reference to
the adoption of any of the methods set out in article 63, nor did it show any
documents that could justify and prove the transfer pricing policy used.
The Claimant did not comply with the provisions of paragraphs 6 and 7 of
article 63 of the CIRC, since it did not have the documentation on organized transfer
pricing in its tax file, nor did it record the transactions with the related
entities in the Annual IES Declaration.
In the exercise of the right to be heard, the Claimant expressed its
disagreement with the AT's position, denying that the interest rate applied to
the financing obtained from its shareholders is excessive and violates the
transfer pricing rules. However, after the exercise of the right of prior
hearing had been thoroughly analyzed and scrutinized, the SIT concluded that
the Claimant did not bring forward elements/ arguments susceptible of altering
the proposed decision.
As regards the corrections made on the invoices of consultancy services,
it is sufficient for the Tax Authorities to gather evidence, although founded,
objective and certain, that the taxable amount stated by the taxpayer is not
the real one, in order to cease the presumption of veracity of its accounting
and of the supporting elements on which such evidence falls, thus inverting the
burden of proof, it being up to the taxpayer to prove that its accounting and
respective elements relate to operations effectively carried out.
This is, in fact, the dominant position of Portuguese jurisprudence, of
which the Judgement of the South Administrative Central Court, dated 2002-04-06,
in the scope of Case 6573/02, is a mere example:
"(. . .) As regards the fact that the invoices are formally
correct, this does not in itself mean that they reflect the reality of the
transactions they represent, and the presumption of the veracity of the writing
ceases in the case of the existence of serious indications that those
transactions did not take place.
In this case - and here we get into the issue of the burden of proof
also invoked by the appellant - if the Administration proves the existence of
serious and credible indications that those transactions are not true, it is up
to the taxpayer to prove the veracity of such transactions. (. ... } It is not
correct to reject as a cost an amount stated in invoices when, after
investigation, the Tax Authorities conclude that there are serious indications
that those transactions were simulated and, consequently, that such costs are
not real. In fact, if one intends, in terms of IRC, to tax the real profit, one
obviously cannot consent to the deduction of taxes resulting from a simulated
operation, under penalty of accepting tax fraud. And in view of such
indications, the presumption of truthfulness of the transactions contained in
the invoices ceases, and the onus of proving that the transactions were effectively
carried out (. . .} becomes incumbent on the taxpayer.
The truth is that the document 15 that was attached in order to prove
the Claimant's allegations, embodied in some emails exchanged between those
entities, must be considered manifestly insufficient to prove the provision of
services in the amount of € 36,900.00, for which the SIT concluded not to
accept the expense and the respective VAT deducted, relative to the services
covered by invoice no. 51, of 16-11-2017, issued by D..., where the generic
description is stated: "Provision of consulting services", as
recorded in the accounting records.
As to the correction to the taxable income, reflected in the increase of
€112,324.11 (regarding financial expenses incurred in the fiscal year of 2017,
with the shareholder loans, based on transfer pricing rules) the truth is that
the Applicant does not attach any evidence of the impossibility of obtaining
financing from financial institutions operating in the market, or that the cost
of such financing by financial institutions was so high that a loan with the
shareholders with a spread of 14% was a compensating alternative.
The Claimant alleges facts that serve as basis and that substantially
configure the alleged legal position it claims, without proving it.
The AT answers on a case-by-case basis:
Regarding the correction to the taxable income, reflected in the
increase of €112,324.11
The remuneration fixed for the loans made to the Applicant by the two
partners, calculated based on the Euribor 12 months x 3.22 rate plus a spread
of 14 percentage points, shows a significant deviation in comparison to the
spreads practiced in bank financings, and is therefore subject to scrutiny
under the rules on transfer pricing.
It is established that the Claimant meets the conditions to benefit from
the exemption of organization and maintenance of the documentation file
regarding the adopted policy and transfer pricing matter foreseen in article
63, paragraph 6 of the IEC Code, by virtue of fulfilling the criterion related
to the turnover defined in article 13, paragraph 3 of the Ministerial Order no.
1446-C/2001, of 21st December.
However, that exemption does not cover the obligation established in
article 63 (7) to "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 operations with entities with which it
is in a situation of special relations
And the Claimant did not comply with this obligation.
It was also clear that the studies and the research of comparable data
to demonstrate the observance of the arm's length principle set forth in
article 63(1), are not contemporaneous with the operations, since they only
emerged and were presented within the scope of the right to be heard on the
draft report of the inspection procedure and of the present impugnation as counter
evidence to the actions of the SITs.
Special relations exist between the Claimant and its two
partners/shareholders, under the provisions of paragraph 4 of article 63 of the
CIRC, with the Claimant agreeing that the method to be adopted for the determination
of the arm's length interest rate, susceptible of ensuring the highest degree
of comparability is the comparable market price method (MPCM) provided for in
paragraph a) of paragraph 3 of article 63 and in paragraph a) of paragraph 1 of
article 4 of Ordinance no. 1446-C/2001.
However, the Claimant alleges that the AT applied an inadequate
methodology to comply with transfer pricing rules, meaning, if it is understood
correctly, that the comparability analysis referred to in articles 5 and 6 of
Ministerial Order 1446-C/2001 was not performed with the required accuracy,
which is an unfounded accusation.
Under the terms of article 245, no. 3, a) of the Commercial Companies
Code, a shareholders' loan contract implies the subordination of credits by
shareholders' loans to all the company's common credits. It is the principle of
protection of other company creditors, which imposes a tutelage of the latter
vis-à-vis shareholders/supplementary shareholders, through the differentiation
between both, both in the field of guarantees and reimbursement.
As these characteristics are inherent to the nature of shareholders'
loans, and because they are granted in circumstances of difficulty in resorting
to bank financing, the onus on the company must be measured by the level of
charges that it would bear if it were in a position to contract a bank
loan. Otherwise, that is, the equation
of shareholders' loans to financial instruments of the venture capital market,
would result in the weakening of the protection of company creditors, which the
legislator of the CSC wished to ensure, as it would allow the setting of
remunerations which incorporate increases due to risk premiums, namely due to
the inexistence of guarantees and the non-priority in the reimbursement.
Therefore, dictated by the concern to avoid that shareholders/holders of
shareholder loans are tempted to fix excessive interest rates, compared to
those practiced in credit operations carried out in the banking market, taking
advantage of the general rule of deductibility of interest for taxable income
purposes, the tax legislator established limits in article 23-A (1) (m) of the
IRC Code, regulated in Ministerial Order no. 279/2014, of 30 December.
Apart from the characteristics of shareholders' loans inherent to the
special status of their holders - the shareholders - and what this implies in
terms of influence on the course of business, the sharing of business successes
and failures and access to information on the financial situation of the
company, there is no reason why this form of financing of the company by
shareholders, alongside equity instruments, should not be considered, in terms
of remuneration, as a normal bank credit operation.
The interest rate fixed on the date of constitution of the shareholder loans,
calculated on the basis of the indexing rate Euribor 12 months x 3.22, plus a
spread of 14%, is justified by three orders of reasons.
The first, points out the difficulties of access to bank credit, in 2014
and 2015, restrictions aggravated by the fact that Portugal is bound to the
economic and financial assistance program agreed with the European Union and
the IMF, and no financial institution would finance the Applicant.
On this argument it should be noted that the Claimant does not attach
any evidence of the impossibility of obtaining financing from financial
institutions operating in the market, or that the cost of such financing by
financial institutions was so high that a loan from the shareholders with a
spread of 14% was a compensatory alternative.
The second has to do with the maturity defined for shareholder loans - 4
years, changed to 8 years in 2019 - and with having stipulated that repayment
would occur at the end of the contract, without interim payments, when it is
certain that the date would always be flexible given the coincidence between
creditors (the shareholders) and the company's management.
Finally, the third reason arises from the subordinate nature of the
shareholder loans and the absence of guarantees.
Well then, the reasons given are not consistent or convincing, and above
all do not explain why the shareholders established such an onerous rate of
interest for shareholder loans, especially since it is not clear how the
company, without prospects of generating abundant financial flows within a
period set for repayment, could proceed to repayment and payment of interest.
The inspection procedure focused on the 2017 tax period, and it should
be noted that, despite a significant change of circumstances, both in the
country's economic environment, and even those relating to the Applicant
itself, as from 2014 and 2015, the positive evolution observed in the financial
indicators was not reflected in the terms and conditions defined ab initio for
the remuneration of shareholders' equity.
In fact, the effective rate used to calculate the interest borne in 2017
was 13.73%. However, the Claimant, as of 04.07.2017, assumed the debtor
position of a loan, of €1,090,000.00, granted by E... to the partner B..., on
05.09. 2016, and whose contractual position was assigned to it under the same
conditions. That is, the remuneration was maintained based on a nominal annual
rate corresponding to the arithmetic mean of the daily quotations of the
6-month Euribor rate of the month prior to the month of the contract date, or
its half-yearly revisions, plus a spread of 3 percentage points.
From the contract, executed on 4/7/2017, of assignment of B...'s
position to the Applicant in the loan contract that the latter entered into
with E... on 5/0/2016 it is stated in the interest clause (3rd) that: the
borrowed capital sells interest during the first semester at the nominal annual
rate of 2.811%; that this rate results from the simple arithmetic average of
the daily quotations of the 6-month Euribor rate of the month prior to the
month of the contrary date, or its half-yearly revisions, increased, on that
date, of a spread of 3 percentage points.
The difference of spreads between the two contracts entered into by the
Claimant demonstrates that the arm’s length principle was not observed in the
contract related to tied operations.
In point III 1.3 of the RIT, the AT demonstrates the corrections it
considered imposed by the disparity of the rates of the shareholder loan
contract and the loan contract entered into by the Claimant.
The Claimant attached to the PPA a Report of economic analysis of the
loans contracted by F... (doc.14) , which focuses on data reported not to 2017
but to 2014 and 2015.
In this study, the search for comparable data is not made in a national
database, which would be more appropriate, but in an international database,
Bloomberg, and chooses as selection criteria of transactions potentially
comparable to shareholder loans debt issues in the financial market classified
as "i) junior subordinated, ii) subordinated or
iii) unsecured", with maturities similar to shareholder loans, but of
higher amounts.
The analysis of the comparability factors listed in article 5 of
Ministerial Order no. 1446-C/2001 is absent, given that the issuers and counterparties
of the operations selected as comparable are not subject to functional,
financial, activity and market characterisation in
which they operate. It is known that the comments identified as comparable were
not contracted in Portugal, but in European countries such as Austria,
Luxemburg, Poland and the Czech Republic, which led to a surcharge for a
country-risk premium.
This mark-up appears as inappropriate, bearing in mind that, in 2017,
there was no evidence that Portugal - integrated in the Eurozone - was listed
with a risk country for the financial markets, which can only be explained by
the need to achieve interest rates close to those practiced in the supplies.
And even after the addition of the country risk premium, the values of the
observations in the arm's length range are only in the 3rd quartile of the
arm's length range close to the interest rate practiced in 2017 in supplies.
Moreover, the OECD Transfer Pricing Guidelines (2017 version), in
Chapter III, paragraph 3.4, in the list of nine indicative steps to be taken in
order to conduct the comparability analysis, first includes (step 4) the
analysis of internal comparables, if any, and only then (step 5) the
determination of available sources of information on external comparables, taking
into account their relative reliability.
In the present case, the studies - the first in the scope of the right
to be heard and the second with the request for arbitral award - presented by
the Claimant ignore this sequence of steps and rely exclusively on the
collection of external comparable data, electing as basic selection criteria,
the binding nature of the shareholder loans and the absence of guarantees.
The economic study itself qualifies the observations identified (7
observations in 2014 and 6 observations in 2015) "as broadly comparable to
the type of financing under analysis", which means that they do not
strictly meet the comparability requirements.
Therefore, the use of the bank loan agreement as a benchmark for gauging
the arm's length remuneration of the shareholder loans under analysis, in
financial year 2017, is the most adjusted solution to the situation at hand,
because it takes into account its specific circumstances surrounding the
operation of granting the shareholder loans.
Regarding the alleged contract for the provision of services
In the RIT it is mentioned that the services rendered are not duly
detailed and identified in the invoice, nor is the date on which they were
rendered indicated, to which is added the lack of evidence that the services
were effectively rendered.
The AT further adds that regarding the alleged services rendered by D...
in the analysis and verification of all documentation, payments and accounting,
the SIT observed that the Claimant has registered in its accounts under the
account "62213 - Specialized works" the invoices issued by the
accounting office "H..., Lda", which
demonstrates the use of an external entity for the provision of such services.
With regard to services related to the execution and management of
contracts, invoices issued by suppliers B... and I... have also been recorded
in the "62213 - Specialised work" account,
which demonstrates that the services of study and preparation of proposals, as
well as contract management, were provided by entities other than D... .
The truth is that document 15 that was attached to prove the Claimant's
allegations, consisting in some e-mails exchanged between those entities, must
be considered manifestly insufficient to prove the provision of services.
Regarding VAT
In the inspection it was concluded, by the analysis of the Claimant's
accounts, that the accounting services were provided by the company H... LDA.
Regarding the services related to the execution of projects and contract
management, it was verified that the invoices issued by B... and I...
(identified in the answer)
Thus, the studies and proposals of the ... and ... were conducted by
I... and B..., respectively.
The contract management services for the ... and of ..., which were in
progress in 2017, and whose invoicing started that year, were performed by B...
.
This demonstrates that the services of study and preparation of project
proposals, as well as those of contract management, were provided by B... and
by I... .
Regarding the remaining services allegedly provided by D..., these are
acts or procedures of mere management of the company, therefore falling within
the scope of the position of company director.
Thus, the Claimant failed to prove its allegations. Neither could it
refute the reasoning that already existed in the RIT that the services
allegedly covered by the invoice under analysis, were provided by other
entities, including accounting services, studies, proposals and contract
management and even those of mere management of the company.
It is clear from the above that the services covered by invoice no. 51,
of 16-11-2017, issued by D..., where the generic description is:
"Provision of consultancy services", as recorded in the accounts,
should not be considered as expenses nor the respective VAT deducted.
Regarding the compensatory interest
The Defendant contests its claim by the Claimant because, under the
provisions of article 43 of the LGT, the right to compensatory interest depends
on the existence of an error of fact or law, attributable to the services,
which resulted in the payment of the tax debt in an amount higher than legally
due, i.e., the law wanted to consider, for the purpose of payment of
compensatory interest, the error that led the AT to an illegal definition of the
legal tax relationship of the taxpayer.
However, in the present case, the assessment in question is not the
result of any error on the part of the tax authorities, but derives directly
from the application of the law.
IV - CORRECTION
1. The parties have legal
personality and capacity, are legitimate and are duly represented (articles 4
and 10, no. 2 of the RJAT and 1 of Ministerial Order no. 112-A/2011, of 22
March).
2. The Arbitration Court is
duly constituted and is materially competent to hear the request (article 2,
no. 1, a) of the RJAT).
3. The process is not
affected by any nullities;
4. The Claimant did not
raise any preliminary question that should be known initially by the Court.
V- Issues to be decided
The issues to be decided in the present case are the following
1. Whether the 14% rate
stipulated in the shareholder loan agreement complies with the rules on market
prices, specifically the arm’s length principle, in the context of the market
economy.
2. Ascertain whether
services were provided to the Claimant by D..., deductible from the Claimant's
CIT
VI - GROUNDS
A - On the matter of fact
Based on the documents provided by the parties and the testimonies given
in this Arbitration Court, the following facts are considered proven
1. The Applicant is a
public limited company incorporated on 24 November 2014, whose corporate
purpose is the implementation and development of energy efficiency projects,
including the supply and replacement of luminaires for LED system. CAE 71120
(engineering activities and related techniques).
2. For corporate income tax
(CIT) purposes, the Claimant falls under the general regime and, for Value
Added Tax (VAT) purposes, under the normal quarterly regime.
3. The Applicant is 51%
owned by B... SA, with headquarters in Portugal, and in 49% by the Fund C... (C...), venture capital investment
entity, managed by D...- Sociedade Gestora de Fundos de Capital de Risco, SA
(D...).
4. I..., LDA, NIPC ...,
holds 100% of the shares of B... .
5. The Plaintiff's
directors J..., are also directors of "B..., S. A." and of "I...
.
6. THE "D... S.
GESTORA DE FUNDOS DE CAPITAL DE RISCO, S.A.". NIPC..., is the management entity of the Fund C... (C...), established
on 27-08-2013 and registered with the CMVM under no. ... .
7. There are special
relations between the Claimant and its shareholders, under the terms of
paragraph a) of no. 4 of article 63 of the CIRC.
8. The acquisition of the
luminaries is made to I... and the services of their installation and assembly
are performed by I... and B... .
9. On 26 November 2014 and
2 December 2015, the Claimant took out loans from B..., in the amount of
€61,716.00 each year, and from C... in the amount of €450,000.00, also in each
year, all contracted with reference to an initial contractual maturity of no
less than 1 year, with repayment of the capital expected only on maturity and
without any associated guarantees.
10. In the loan agreements
initially signed the repayment period was 4 years, having been amended in 2019
to include a repayment period of 8 years.
11. Those two contracts were
not executed by public deed, as they should have been according to article 1143
of the Civil Code.
12. The parties established
that the shareholder loans would bear interest annually at a rate of
3.22xEuribor 12 months plus a spread of 14%.
13. As at 31 December 2015,
the Claimant owed €123,432.00 to B... and €900,000.00 to C... ( for a total of
EUR 1,023,432.00 ) and this amount was repeated in 2016 and in 2017.
14. In 2017, the effective
interest rate borne by the Claimant as a result of the shareholder loans was
13.73%.
15. In 2017, the following
debit movements were recorded in account 6911 - "Interest from financing
obtained":
Currency: Euro
Date Journal Doc. Description Account Credited Amount Annex
30-06-2017 1 5 Interest 27880004 - D... 30,644.70 II - Fl. 1
30-06-2017 1 6 Interest 27880004 - D... 30,644.70 II - Fl. 2
30-06-2017 1 7 Interest 27880012 - B... 4,202.82 II - Fl. 3
30-06-2017 1 8 Interest 27880012 - B... 4,202.82 II - Fl. 4
30-11-2017 1 9 Interest 27880004 - D... 62,305.25 II - Fl. 5
31-12-2017 1 4 Interests 27880012 - B... 8,544.96 II - Fl. 6
Total 140,545.25
16. In 2017 the Claimant
invoiced an amount of €176,882.82.
17. In 2017, the Claimant
declared income amounting to € 143,807.17 and recorded expenses amounting to €
51,289.59 and interest on financing obtained amounting to € 150,353.52,
resulting in a negative net result of € 165,418.49.
18. On 5/9/2016 a loan
agreement was entered into between E... and B... .
19. In July 2017, the
Claimant succeeded B... in the agreement referred to in the preceding
paragraph.
20. 20. The Claimant meets
the turnover criterion defined in no. 3 of article 13 of Ministerial Order no.
1446-C/2001, of 21 December, so it does not have to comply with the provisions
of no. 6 of article 63 of the CIRC regarding the organization of transfer
pricing documentation.
21. In the reply that the
Claimant sent to the AT with the explanations for the choice of the 14% spread,
the Claimant did not make any reference to the adoption of any of the methods
established in article 63 of the CIRC nor did it exhibit any documents
susceptible of justifying and proving the transfer pricing policy used.
22. The Claimant did not
record in Box 10 of the Annual Return of the IES the transactions with related
entities, in the terms required by no. 7 of article 63 of the CIRC.
23. The interest rates of the
bank loan agreement as a benchmark for gauging the arm's length remuneration in
2017 were 2.782% in the first half and 2.733% in the second half.
24. The Claimant has recorded
in its accounts under account "62213 - Specialised
work" the invoices issued by the accounting firm "H..., Lda".
25. The services related to
the execution and management of contracts, were registered in the account
"62213 - Specialised works" and the
invoices issued by the suppliers B... and I... .
26. A... enters into Energy
Efficiency Management Contracts with Municipalities, to implement measures to
improve energy efficiency in public lighting, consisting in the supply and
replacement of luminaires for the LED system, receiving from those
Municipalities the value equivalent to the energy saving.
27. On 10-03-2016 was signed
the Energy Efficiency Management Contract, for the Implementation of Measures
to Improve Efficiency in Public Lighting in the Municipality of ..., between
this Municipality and the external consortium, consisting of the companies B...
and A..., for a period of 12 years.
28. On 30-05-2017 the Energy
Efficiency Management Pilot Contract for the Implementation of Measures to
Improve Efficiency in Public Lighting in the Municipality of ... was signed
between this Municipality, B... and A..., which were constituted in an external
consortium of joint and several liability, called B.../A... IN CONSORTIUM,
through consortium contract dated 12-04-2017.
29. In the year 2017 the
Applicant started invoicing services to the Municipalities of .... and of ...,
which resulted in the following amounts: ...- € 124,497.07; ... - €
19.310,10. A total of € 143,807.17.
30. In 2019, the Claimant was
the object of an inspection action carried out by the Defendant, regarding
corporate income tax and VAT for the fiscal year of 2017.
The judgment of the factual matter was based on the documentary evidence
brought to the case file by the Claimant and that contained in the attached
administrative proceeding. The documentary evidence was assessed in light of
the Tribunal's experience and the position taken by the Respondent regarding
each allegation of fact produced by the Claimant in its PPA. Witness testimony
was provided which supported the understanding of the comparability proposed in
the "F... report". No other allegations of fact were identified, from
which the conclusions and invocation of law by the parties are obviously
excluded.
B - On the Law
The first issue to be assessed by this Arbitral Tribunal has to do with
the interest rate that was in force in 2017, the year of the inspection, which
was agreed upon by the Claimant in the loan agreements entered into on 26
November 2014 and 2 December 2015, with B... and with the C... Fund, which are
its sole shareholders. In fact, the parties established that the shareholder
loans would bear interest annually at the rate of 3.22x12-month Euribor, plus a
spread of 14%, and the effective interest rate borne by the Claimant as a
result of the shareholder loans was, in 2017, 13.73%.
None of the parties contest that between the contracting parties of the
shareholder loans - the Claimant and its shareholders - there are special
relations, as they meet the requirements defined in no. 4 of article 63 of the
CIRC. For this reason, the deductibility of the interest of the shareholder
loan agreements in crisis in the case records falls within the scope of
application of article 23-A (1) (m) of the CIRC, according to which the
following are not deductible for purposes of determining the taxable income: m)
Interest and other forms of remuneration of shareholder loans and loans made by
the shareholders to the company, in the part that exceeds the rate defined by
an Ordinance of the Government member responsible for the finance area, except
when the regime established in article 63 is applied;. This Ministerial Order
is no. 279/2014, of December 30.
The Claimant only claims that the arm’s length principle were observed in the execution of the supply
contracts, but during the inspection did not submit any supporting document.
Only during the phase in which it exercised its right to be heard regarding the
draft report did it submit studies and comparisons with which it intends to
demonstrate that the arm’s length principle was observed.
The Claimant justifies that it
was not obliged to do so because the turnover criterion defined in nr. 3 of
article 13 of Ministerial Order nr. 1446-C/2001 of December 21st was applied to
it, since its net sales volume was less than 3.000.000,00 Euros, therefore it
does not have to comply with the provisions of nr. 6 of article 63 of the CIRC
concerning the organization of transfer pricing documentation.
However, the obligation to document the operation, does not only result
from the rule of Article 63, paragraph 6 of the CIRC; the documentation of
accounting operations is an imperative of the accounting method itself, it is
even its very first support, which allows to ensure that the transactions in
question have effectively the configuration with which they were entered in the
records. In addition, it is a true legal obligation, arising from article 123,
no. 2 of the CIRC, which imposes that "In the execution of the accounting,
the following in particular must be observed: a) All entries must be supported
by supporting documents, dated and capable of being presented whenever
necessary".
In this line of reasoning, there should always be in the Plaintiff's
accounting documentation any supporting document of the operations performed.
As Joaquim R. Pires writes, there is the expectation, by the AT, that the
taxpayer has, and can provide for analysis, the elements that, in view of the
concrete facts and circumstances that characterize its activity and in a
framework of good commercial and financial practices, it should reasonably hold
to determine and prove the conduct adopted in the setting of transfer prices,
without, however, being forced to incur disproportionate compliance costs. (in
"Transfer Prices", Vida Económica edition,
page 30).
At this point, the Court considers that the AT is right, when affirming
in its response that the non-submission to paragraph 6 of article 63 of the
CIRC does not exempt it from fulfilling the obligation established in paragraph
7 of article 63 to indicate, in the annual statement of accounting and tax
information referred to in article 121, the existence or inexistence, during
the tax period to which it relates, of operations with entities with which it
is in a situation of special relations...".
Claimant and Respondent agree that the method to be followed in the
transfer pricing analysis should be the comparable market price method (MPCM).
However, the Claimant disagrees that the comparability between contracts for
determining market prices should be made, as the AT did in the inspection,
through the comparison of the shareholder loan contracts with the loan contract
that B... contracted with E..., in 2016, with a spread of 3%, a contract in
which the Claimant later took the position of its shareholder, in 2017.
Therefore, let us analyse the situation and the argumentation associated
to it by the parties.
First of all, however, in this matter, it should always be kept in mind
that prices contracted between dependent entities, that is, in tied
transactions, necessarily influence the taxable income of the taxpayer, shaping
it based on values that, even if real, are distorted by the existence of
relationships that foster an artificially agreed upon price fixing. Therefore,
the AT, when analyzing the supply contracts agreed between the Applicant and
its shareholders, fulfilled the power/duty conferred by paragraph 2 of article
3 of the mentioned Ministerial Order no. 1446-C/2001.
As stated in the CAAD Decision rendered in Proc. no. 609/2015-T, p. 14,
That is, when faced with the finding of the existence of special relations
between two entities, [the AT] cannot simply form a conviction, aprioristically
and rigidly, that the conditions practiced are different from those that would
exist between unrelated parties, avoiding a factual, considered and neutral
analysis of the situation in order to conclude whether or not there is the
establishment of conditions different from the conditions that would normally
be agreed upon.
The Claimant believes that there is no comparability between the two
contracts, because one has a spread of 14% and the other 3%. The Claimant alleges
that in these terms the AT violates the requirements established by article
63(2) of the CIRC and by article 6(1) of the Ministerial Order.
However, with all due respect, the Court considers that it is precisely
this very reason that most justifies the comparability between the two
contracts. The ratio legis for the requirement of
submitting contracts entered into between entities with privileged relations to
the rules of the arm's length principle is to prevent tax avoidance, that is,
to prevent these entities from using legal devices to avoid presenting the
taxable income that would be presented if they did not use such devices. In
these terms, having existed a loan agreement - a financing agreement, as with
the shareholder loans - entered into with an entity outside the group, where a
spread of 3% was defined, the comparison of the transfer prices of the
shareholder loan agreements must be established with it, where the spread
between the companies with privileged relations was agreed to be 14%. It is this
difference of criteria adopted by the Claimant in its financing transactions
that justifies establishing the comparison between them.
With the comparison between those contracts is, therefore, to comply
with the arm’s length principle established in Article 1(1) of the Ordinance,
by determining that in tied transactions "terms and conditions must be
contracted, accepted and practiced substantially identical to those that would
normally be contracted, accepted and practiced between independent entities in
comparable transactions".
As stated by the South Central Administrative Court in its judgment of
16 December 2020 (rendered in Case No. 1882/14.4.BESNT, available at
www.dgsi.pt) :
The correction to the taxable
amount made by the impugned Tax and Customs Authority relates to transfer
pricing. We are therefore dealing with a specific anti-abuse clause, which
seeks to prevent tax avoidance, achieved through the practice of excessively
high or excessively low prices, in comparison to what would occur in the
so-called normal market conditions, between independent entities and in an arm’s
length situation.
These rules seek to prevent price manipulation in intra-group
transactions in order to reduce effective taxation.
The Claimant justifies the contractualization
of the spread in supply contracts based on three orders of arguments:
- The first refers to the impossibility of the Claimant financing itself
with banks, due to the economic and financial crisis in Portugal in 2014 and
following years, which led to the intervention of the IMF and the European
Union;
- The second has to do with the fact that the maturity defined for the
shareholder loans was 4 years and also that it was stipulated that the
reimbursement would only occur at the end of the contract.
- Finally, the third argument arises from the subordinated nature of the
shareholder loans, which do not offer guarantees to the shareholders. It is
also said that it arises from the risks allegedly incurred by the shareholders.
Now, regarding the first argument, it falls immediately by the base,
since the Applicant has not proved that it had made any effort to finance
itself with the bank and that this effort was unsuccessful. On the contrary, it
seems to result from the request for arbitration award that the Claimant and
its shareholders have immediately assumed that, given the financial situation
that the country was still experiencing in 2014, any request for financing made
by a newly created entity and without business expectations would be rejected
outright by all banks.
For that reason, the Claimant did not prove, nor could it, that the
interest it contracted with its shareholders was more favourable
to it than what the banks would demand from it. In short, it cannot but be
stated that, in view of this, the Defendant could not assume any other position
than to investigate whether the shareholders of the Claimant had taken
advantage of the socio-financial context of the country to contract a fixed
spread of 14%.
The second argument is also not convincing, since the stipulation of the
term was established between the Claimant and its shareholders, this term would
always be flexible, since it was agreed upon between entities with privileged
relations.
The third argument also fails, since the shareholders, when contracting
shareholder loans, incur lower risks than independent entities when financing
companies. It is because, as the Respondent rightly claims in its response, due
to provisions contained in the Companies Code, the shareholders enjoy a range
of corporate rights that allow them a more precise and permanent access to
information on the financial situation of the company - and may even hold
positions of administration or management of the company's business -, thus
being able to claim their credits in a privileged situation in relation to
other corporate creditors.
As said, the Claimant does not agree that the analysis of the transfer
prices practiced by it had been performed by the Defendant from the loan
agreement entered into between B... and E..., an agreement in which it itself
succeeded its shareholder in 2017.
For such reason, the Claimant submitted at the time of the exercise of
the right to be heard an analysis report of the shareholder loans it had
contracted, a report that was prepared by the international consultancy F... ,
which selected an international database, Bloomberg, as a search base for
comparable data, and chose as selection criteria for transactions comparable to
the shareholder loans, debt issues in the financial market classified as "i) junior subordinated, ii) subordinated or iii)
unsecured", with terms similar to the shareholder loans, but of higher
amounts, contracted in the same way as the shareholder loans in 2014 and 2015.
The Claimant justifies that through Blomberg's database it is possible
to obtain "the highest degree of comparability" provided for in
Article 6(1) of the Ministerial Order. The AT, in turn, as already noted, does
not agree with the comparability, moreover, because it argues that the
comparables should have been selected from the domestic market.
The Court considers that the mere fact that the entities chosen by F...
are not Portuguese does not constitute, per se, a reason for the contracts not
to enjoy a degree of comparability that complies with both the rules set out in
the Ministerial Order and the OECD Guidelines, which, as the preamble of the
Ministerial Order itself states, are interpretative elements of the provisions
contained in the Ministerial Order itself. However, as the Respondent rightly
points out, this circumstance, that of the existence of comparables in the
internal market, constitutes a preferential analysis factor, as such defined in
the national law ( art. 5 of the Ordinance) and in the OECD Guide Lines (step 4
of paragraph 3.4. of Chapter III of the Guide Lines, 2017).
Although not only, but also for this reason, the Tribunal considers that
the comparison made by the Respondent between the loan agreements entered into
in 2014 and 2015 between the Claimant and its shareholders and the loan
agreement initially entered into by the Claimant's shareholder, B..., which it
succeeded in 2017, enjoys a higher degree of comparability, out of respect for
the arm’s length principle. The Court
adds two further reasons to this.
The first is related to the fact that both shareholder loan agreements
and loan agreements have the purpose of financing one of the parties. In the
present case, the circumstance that the loan agreement has been entered into by
one of the shareholders of the Claimant with an independent entity also
reinforces the comparability. In other words, it is about establishing the
comparison between linked transactions (the supply contracts) and a non-linked
transaction (the loan), but which has as one of the parties entities that
intervened in the linked transactions, which in this case contracted with an
independent entity (E...).
The second has to do with the
dates and conditions of the national market in which they were agreed upon. In
fact, notwithstanding the fact that the dates and the Portuguese economic and
financial contexts existing on the date of conclusion of the shareholder loan
agreements (2014 and 2015) and of the loan agreement (2016) were already
different in the year in which the inspection took place (2017), the
shareholder loan agreements had not accompanied that evolution of the market,
which was already more favourable for financing,
maintaining the same 14% spread that had been defined in 2014.
Now, the study conducted by F..., which the Claimant presented when
exercising the right to be heard regarding the draft final report of the
inspection action (RIT), selected data of comparable contracts concluded in
2014 and 2015, that is to say, without possible comparison with any possible
adjustments of the same reflecting what was happening in 2017, which was the
year on which the AT's analysis focused.
These are the reasons why the Court considers that the transactions
carried out by the AT reflect a reliable degree of comparability that respects
the rules on transfer pricing set out in the CIRC (Article 63), in the
Ministerial Order and in the OECD Guidelines, with regard to the principle of
comparability and the arm’s length principle. Specifically, this comparison is
the one that best complies with the provisions of paragraphs 2 and 3 of article
4 of the Ministerial Order, according to which
2- The most appropriate method for each transaction or series of
transactions is considered to be that which is likely to provide 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, The option should be made for the method that is most apt to provide
the highest degree of comparability between the tied and other non-tied
transactions and between the entities selected for comparison, that relies on
the best quality and largest quantity of information available for its adequate
justification and application and that implies the least number of adjustments
for the purpose of eliminating differences existing between facts and
comparable situations.
3 - Two transactions meet the conditions to be considered comparable if
they are substantially identical, which means 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
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 choice made by the AT to establish the comparison also proves to be
the most respectful of the provisions of paragraphs 1 and 2(b), also of the
Ministerial Order, which determine that
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 transaction and on the functional analysis of the intervening
entities.
2 - This method may be used, namely, in the following situations:
a. When the taxpayer or an
entity belonging to the same group carries out a transaction of the same nature
which has as its object an identical or similar service or product, in similar
quantity or value, and on substantially identical terms and conditions, with an
independent entity in the same or similar markets;
As the Respondent summarized very well in its allegations (no. 58) That
is, if an independent bank agreed to provide financing to the Claimant, of
similar amount and term to the shareholder loans, remunerated at an annual
nominal interest rate (TAN) calculated according to the monthly average of the
6-month Euribor rate of the previous month, plus a spread of 3 percentage
points, then nothing justifies that the partners require from the company a
remuneration for the shareholder loans that includes a spread of 14 percentage
points.
By acting as it did, the Defendant did what it was required to do and
which is a consolidated jurisprudence of the Supreme Administrative Court: that
the AT is responsible for proving the assumptions on which the transfer price
adjustments are based, which includes the identification and proof of special
relations and that the price charged is not the market price, as well as the
market price applicable to the case (see STA judgments of: 27/6/2018 (proc. no.
01402/2017; 21/9/2016 (proc. no. 0571/2013; 14/5/2015 (proc. no. 0833/2013);
11/3/2015 (proc. no. 0145/2014).
Of the alleged service contract entered into between the Claimant and
D...
alleges that the Claimant entered into a contract with D... to provide
technical monitoring and follow-up services of management control and
administration of the funds allocated to the investment, since it does not have
any staff. This is what the witnesses also stated in their examination, and
this is what the Claimant intended to prove with the attachment of document no.
15 to the request for an arbitration award
However, as already stated, the RIT proves that these services are not
duly detailed and identified in the invoice and the date on which they were
performed is not even indicated, that is, the requirements of nos. 3 and 4 of
article 23 CIRC were not fulfilled, a fact that, by virtue of paragraph c) of
no. 1 of article 23-A, leads to the non-deductibility of these invoices.
Moreover, by letter dated 21 October 2020, the AT requested the Claimant
to present the material evidence of the provision of services by D..., and the
Claimant only presented the contract for the provision of services, without any
documentary evidence that they were effectively provided.
But it was not only the formal issue that justified the position of the
AT and that leads this Court to agree with it. The absence of material evidence
that the work had been performed is further compounded by the fact that, during
the inspection, the AT found invoices (which the Claimant has registered in its
accounts under account "62213 - Specialized work"), issued by the
accounting firm "H..., Lda, as well as other
"Specialized work", for services related to the execution and
management of the contracts, issued by suppliers B... and I..., which indicates
that entities other than D... were involved in the provision of services. The
management services for the ... and of ..., which were ongoing in 2017, and
whose invoicing started that year, were performed by B... and I... and not by
D... .
Thus, the association of all the facts necessarily leads to the
non-deductibility of D...'s invoice, since it was up to the Claimant to prove
that the work was performed by D... and it failed to do so.
As recently decided by the South Administrative Central Court in its
ruling of 27 May 2021 in case no. 744/11.1BELRA (available at www.dgsi.pt) I-
Invoices are not only relevant documents for the purpose of exercising the
right to deduct, but also relevant for the purpose of exercising the AT's
control powers. II- There is no hierarchy between the various requirements
imposed on invoices. III- The CJEU has held that the right to deduct is
admissible even if some formal requirements are not met by invoices, provided
that the material situation is demonstrated. IV- The failure to scrupulously
comply with the formalities required in terms of issuing invoices may not
compromise the exercise of the right of deduction, provided that the
substantive requirements have been complied with and that the AT has all the
elements to substantively characterise the
transaction, it being understood that the burden of proof will rest with the
taxable person. V- As no documentary evidence has been submitted containing a
content that enables the gaps in the invoices to be overcome, the right to
deduct is not admissible.
Therefore, as the Claimant has not complied with the provisions of nos.
3 and 4 of article 23 of the CIRC, by virtue of paragraph c) of no. 1 of
article 23-A, the invoice for the provision of services in the amount of
€30,000.00, which determines the correction of the taxable income in that
amount, cannot be deductible.
And having the Court understood that the invoice of D... invoice was not
deductible, the VAT issue is resolved, as the same would only not be due if the
amount of €30,000.00 invoiced by D... .
And since the Court has not acknowledged the existence of any error
attributable to the Defendant AT, the Claimant is not entitled to compensatory
interest, under the terms defined in article 43 of the General Tax Law.
VII - Decision
Based on these grounds, the Court decides to consider the request made
by the Claimant as totally unfounded, and the Claimant is not entitled to
compensatory interest, due to the fact that the assessments of:
a. IRC, with no. 2020 ...,
relative to the year 2017, which adjusted the taxable amount in €155,814.99;
b. of VAT, with no. 2020 ..., relative to the year 2018, according to
which the tax payable was calculated in the amount of €6,900.00.
VIII - Value
Sets the value of the proceedings at € 162,714.99 (one hundred and
sixty-two thousand, seven hundred and fourteen euros and ninety-nine cents), in
accordance with article 97-A, no. 1, paragraph a) of the CPPT, applicable by
virtue of paragraphs a) and b) of no. 1 of article 29 of the RJAT and of no. 2
of article 3 of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).
IX - Costs
Costs to be borne by the Claimant, in the amount of ¤12,000.00 (twelve
thousand euros), calculated in accordance with article 12, no. 3 (Legal Regime
of Arbitration in Tax Matters), article 3, no. 1, b) and article 5, no. 2 of
the RCPAT (Regulation of Costs in Tax Arbitration Proceedings) and in Table II
attached to the same Regulation.
Notified.
Lisbon, 23 March 2022
The arbitrators
Manuel Luís Macaísta Malheiros,
Chairman
Dr. Nuno Maldonado Sousa
Dr. Francisco Carvalho Furtado