Tag: Comparable circumstances

Portugal vs “V… Multimédia – Serviços de Telecomunicações e Multimédia, SGPS, S.A.”, December 2022, Supreme Administrative Court, Case 02142/11.8BELRS

The tax authorities had issued a notice of assessment in which payments for a parent company guarantee had been adjusted on the basis of the arm’s length principle. The Administrative Court of Appeal annulled the assessment. The tax authorities filed an appeal with the Supreme Administrative Court. Judgement of the Court The Supreme Administrative Court upheld the decision of the Administrative Court of Appeal and dismissed the appeal of the tax authorities. According to the Court, I – The Tax Administration may, under the provisions of article 58 of the CIRC, make corrections to the taxable income whenever, by virtue of special relations between the taxpayer and another person, whether or not subject to IRC, different conditions have been established in certain operations from those that are generally agreed upon between independent persons and these particular conditions have led to the profit ascertained on the basis of accounting being different from that which would have been ascertained had such special relations not existed. II – It is incumbent on the Tax Administration to allege and prove both the existence of special relations and the “normal circumstances” under which certain transactions take place, that is, the conditions under which, as a rule, those transactions take place between independent legal persons. III – As the assessment of comparability of transactions, required by Article 4(3) of Ministerial Order 1446-C/2001, is based on an economic criterion, the assessment issued under Article 58 of the CIRC must be annulled if the tax authorities were unable to demonstrate that, in the specific case, the transactions present relevant economic and financial characteristics that are sufficiently similar to ensure the high degree of comparability legally required in order for corrections to be made to the taxable amount via the transfer pricing regime. IV – The rules of hermeneutics of tax law do not allow Article 17 EBF to be interpreted as meaning that, in cases where employment contracts that are eligible under the aforementioned article terminate or commence during the tax period, the maximum limit of the increase provided for in no. 1 should be restricted in proportion to the time the contracts have been in force. V – In tax benefits that depend on the behaviour of the taxpayer, who may freely choose to fulfil the legally established conditions in order to enjoy them, the question of the principle of equality should be posed in relation to the conditions of access to the benefit and not in relation to the contours in which they are provided. VI – There is no discriminatory treatment, or even arbitrariness of the legal solution, if it is placed at the disposal of the taxpayer to optimise the variable effects of the tax benefit. Extracts from the judgement “In view of the provisions of article 5 of Ministerial Order no. 1446-C/2001, especially paragraph d), one cannot ignore the fact that the relationship between the Impugnant and its controlled companies cannot be comparable to the relationships established between entities that are independent from each other, as the latter are normally prevented under the terms of article 6(3) of the CSC from providing this type of guarantees to third parties, this function being reserved for credit institutions. In this regard, it should also be noted, as pointed out in the appealed decision, that the economic risk borne in the two operations is significantly different and “although the guarantee and the autonomous bank guarantee may share common characteristics, the way in which the risk falls on the guarantor and on the guarantor of the autonomous bank guarantee potentially generates differences that significantly affect their comparability” (emphasis added). 3.2.5.6 In conclusion, as it is the responsibility of the Tax Administration to demonstrate the verification of the prerequisites for applying the transfer price regime enshrined in Article 58(1) of the CIRC – which is the responsibility of the Portuguese Tax Authorities – it is important that the transfer price regime is applied. In conclusion, as it is the Tax Authorities’ duty to demonstrate the verification of the assumptions of application of the transfer pricing regime set forth in article 58, no. 1 of the CIRC – which, in this case, would translate into proving that the provision of guarantee by the Appellant and the provision of autonomous bank guarantees whose costs were supported by the Appellant, meet conditions to be considered comparable, as they present sufficiently similar relevant economic and financial characteristics -, which proof it failed to do, it is necessary to conclude, as did the appealed sentence, for the existence of error on the factual and legal assumptions of the assessment leading to its annulment in this part. The present appeal should, therefore, be dismissed in this part, on the grounds set out above.” Click here for English translation. Click here for other translation Portugal-vs-Servicos-de-Telecomunicacoes-e-Multimedia-SGPS-SA-December-2022-SAC-ORG ...

TPG2022 Chapter X paragraph 10.18

In common with the analysis of any other transaction between associated enterprises, in applying the arm’s length principle to a financial transaction it is necessary to consider the conditions that independent parties would have agreed to in comparable circumstances ...

TPG2020 Chapter X paragraph 10.18

In common with the analysis of any other transaction between associated enterprises, in applying the arm’s length principle to a financial transaction it is necessary to consider the conditions that independent parties would have agreed to in comparable circumstances ...