International Journal of Law and Management

(1)

International Journal of Law and Management

A special feature of corporate income taxation in Portugal: the autonomous taxation of expenses

Ana Dinis, António Martins, Cidália Maria Lopes,

Article information:

To cite this document:

Ana Dinis, António Martins, Cidália Maria Lopes, (2017) "A special feature of corporate income taxation in Portugal: the autonomous taxation of expenses", International Journal of Law and Management, Vol. 59 Issue: 4, pp.489-503, https://doi.org/10.1108/IJLMA-01-2016-0004 Permanent link to this document:

https://doi.org/10.1108/IJLMA-01-2016-0004 Downloaded on: 22 January 2018, At: 08:05 (PT)

References: this document contains references to 38 other documents.

To copy this document: permissions@emeraldinsight.com

The fulltext of this document has been downloaded 267 times since 2017*

Users who downloaded this article also downloaded:

(2012),"Tax compliance of small business owners: A review", International Journal of Entrepreneurial Behaviour & Research, Vol. 18 Iss 3 pp. 330-351 <a href="https://

doi.org/10.1108/13552551211227710">https://doi.org/10.1108/13552551211227710</a>

(2017),"Tax havens: conduits for corporate tax malfeasance", Journal of Financial Regulation and Compliance, Vol. 25 Iss 1 pp. 86-104 <a href="https://doi.org/10.1108/JFRC-04-2016-0039">https://

doi.org/10.1108/JFRC-04-2016-0039</a>

Access to this document was granted through an Emerald subscription provided by emerald- srm:268629 []

For Authors

If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information.

About Emerald www.emeraldinsight.com

Emerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services.

Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation.

Downloaded by Católica Porto: Universidade Católica Portuguesa At 08:05 22 January 2018 (PT)

(2)

*Related content and download information correct at time of download.

(3)

A special feature of corporate income taxation in Portugal: the autonomous taxation of expenses

Ana Dinis

Universidade de Coimbra, Coimbra, Portugal

António Martins

University of Coimbra, Coimbra, Portugal, and

Cidália Maria Lopes

Coimbra Polytechnic Institute, Coimbra, Portugal

Abstract

Purpose –The purpose of this paper is to discuss the following research questions: Is the Portuguese corporate income tax (CIT) losing its internal consistency by extending the autonomous taxation of expenses (ATE)? Are receipts derived from autonomous taxes so relevant that what began as an exception is gradually becoming a permanent feature of the income tax? Given the constitutional principle that corporate taxation should be fundamentally based on income, is the taxation of expenses unconstitutional? Is Portugal an international outlier, in applying this type of taxation to corporate expenses?

Design/methodology/approach–The methodology used in the paper is a blend of legal research method and case study analysis. The interpretation of legal texts and the ratio legis discussion (hermeneutical side), the evaluation of advantages and disadvantages of autonomous taxes (argumentative approach) and the use of aggregate data to gauge an impression of autonomous taxes’

impact on global tax receipts (empirical side) will, jointly, be used to analyse the topic. Autonomous taxation is a case study on how a (albeit distortive) solution is being applied in an European Union (EU) country to signiﬁcantly enhance corporate-related tax revenue.

Findings – The authors conclude that autonomous taxation is a relevant source of revenue and its elimination is not foreseeable, at least in the medium term. Moreover, the extension of the tax base is gradually transforming CIT in a kind of dual tax, by charging proﬁts and some expenses. The Constitutional Court, stressing the equity principle, has not ruled autonomous taxation unconstitutional, invoking usefulness against tax evasion. Finally, with the exception of some Portuguese-speaking countries, no other comparable international experience is observed.

Practical implications–The autonomous taxes (ATE) and its progressive enlargement imply, on the one hand, that the CIT has been slowly, but inexorably, losing its sole purpose of taxing proﬁts, and imposing a tax penalty on an increasing set of accounting expenses. On the other hand, the growing number of expenses subjected to taxation leads some authors to ponder if the Portuguese tax regime is losing attractiveness. By increasing ATE’s scope, the effective rate tends to move upwards, countering reductions in the statutory rate. Finally, tax law will increasingly inﬂuence managers’ daily decisions, given the set of expenses targeted by autonomous taxes.

Originality/value–Taking into account the aim of this study, the discussion of a Portuguese particular feature of corporate taxation can highlight useful policy points to a broader audience. Many Organization for Economic Cooperation and Development (OECD) countries face a dire situation in publicﬁnances. Therefore, given the pressure to increase tax receipts, the ATE can be a case study on how a (albeit distortive) solution is being applied in an EU country to signiﬁcantly enhance corporate-related tax revenue.

Keywords Autonomous taxation of expenses, Corporate income taxation, Tax base Paper typeConceptual paper

Corporate income taxation in Portugal 489

Received 8 January 2016 Revised 24 March 2016 Accepted 30 March 2016

International Journal of Law and Management Vol. 59 No. 4, 2017 pp. 489-503

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/1754-243X.htm

(4)

1. Introduction

The analysis of the corporate income tax (CIT), especially in Organization for Economic Cooperation and Development (OECD) countries, has mainly focussed on global trends, such as the evolution of statutory and effective tax rates or the ﬁ ght against international tax evasion (Richardson, 2006; Bartelsman and Beetsma, 2003).

Research at US public policy centres (Diamond and Zodrow, 2013), the Mirrlees report (Mirrlees et al., 2011) and efforts currently under way in the European Union (EU) (Osterloh and Hienemann, 2013; European Commission, 2011) have highlighted the critical points that corporate tax policy in an international setting must deal with.

Devereux et al. (2002) argue that the corporate tax debate focuses primarily on four main concerns: how to maintain tax revenue levels, what are the most effective measures to attract investment, how to decrease distortions induced by corporate taxation and how to reduce complexity under the CIT.

Empirical work, such as Fochmann et al. (2012), Hristu-Varsakelis et al. (2011) and Slemrod (2004), discusses the relationship between globalization and ﬁ scal policy, emphasizing that capital ﬂ ows’ liberalization made corporate taxation a factor of great importance in the competition to attract investment.

Portugal has introduced a CIT, in its modern con ﬁ guration, in 1989. Several subsequent modi ﬁ cations, induced by global trends and, particularly, by the country’s membership of EU made the CIT very similar to what is observed in most European countries. To name a few, features like the participation exemption regime, incentives to R&D by favouring intangibles, restrictions to interest deduction following thin capitalization rules and the introduction of several anti-abuse clauses, brought a high degree of similarity with our main trading partners and potential investors.

However, one special feature of the Portuguese CIT stands out: the existence of autonomous taxation. That means using some recorded expenses as tax base, within the CIT Code.

Autonomous taxation of expenses (hereafter, “ATE”) has been a contentious issue and has generated controversy among authors. The concept of “autonomous taxation” was created by Decree Law No. 192/1990, outside the CIT Code. Subsequently, Law 30-G/2000 extended the reach of ATE and placed it into the CIT Code. Presently, the following expenses are subjected to autonomous taxation: non-documented costs[1], vehicle-related expenses[2], entertainment expenses[3], pro ﬁ ts distributed to tax-exempt entities[4], compensation paid to managers[5], allowances and compensation for use of employees’ own vehicles[6] and payments to entities located in tax-favoured territories[7].

The ATE and its progressive enlargement imply, on the one hand, that the CIT has been, slowly but inexorably, losing its sole purpose of taxing pro ﬁ ts, and imposing a tax penalty on an increasing set of accounting expenses. On the other hand, the growing number of expenses subjected to taxation leads some authors to ponder if the Portuguese tax regime is losing attractiveness. By increasing ATE’s scope, the effective rate tends to move upwards, countering reductions in the statutory rate. Finally, tax law will increasingly in ﬂ uence managers’ daily decisions, given the set of expenses targeted by autonomous taxes.

In this context, the purpose of this paper is to address the following research topics: is the Portuguese CIT losing its internal consistency by extending the ATE? Are tax revenues derived from autonomous taxes so relevant that what began as an exception is gradually becoming a permanent feature of the CIT? Given the constitutional principle that corporate taxation should be fundamentally based on income, is the taxation of expenses unconstitutional? Is Portugal an international outlier in applying this type of taxation?

IJLMA 59,4

490

(5)

The paper is structured into seven sections. Section 2 offers a literature review. Section 3 deals with methodology. Section 4 shows the economic relevance of the CIT, focussing on its contribution to tax revenues. Section 5, the core of the paper, exhibits legislative developments, focussing on the evolution of tax base and tax rates that characterize ATE, presents data on its contribution to total CIT in ﬂ ows, discusses ATE’s impact on CIT internal consistency and analyses its conformity with constitutional principles underlining corporate taxation. Section 6 offers an international comparative perspective. Section 7 concludes.

2. Literature review

The CIT is levied on a surplus, equal to revenues minus expenses. Thus, the use of expenses as a signi ﬁ cant tax base, in the context of corporate income taxation, is not regularly observed around the world. Therefore, to the best of our knowledge, there is a relative scarcity of global literature on this topic.

However, given the link between autonomous taxes, the ﬁ ght against evasion and the dif ﬁ culty of distinguishing corporate-related costs from peripheral or personal expenses, we can draw some broad guidelines from the tax evasion literature. Additionally, targeting expenses has, undoubtedly, some impact on management decisions related to the incurred and taxed costs (e.g. the choice of company cars to be acquired can be affected by autonomous taxes on vehicles), another line of enquiry can be found here.

Mohdali et al. (2014) and Fochmann et al. (2012) argue that taxpayers develop clear perceptions of the fi nancial consequences of taxation. Management decisions are undoubtedly in fl uenced by tax burdens imposed on fi rms. According to the traditional theory of tax evasion proposed by Allingham and Sandmo (1972), the degree of compliance is affected by – albeit not only – the threat of punishment.

The Portuguese ATE does not con fi gure some sort of punishment for misreporting tax due or for any criminal offence. Instead, it is a fi nancial penalty imposed on certain types of costs that tax law intends to discourage by overtaxing them. Thus, over taxation is found to be a proper mechanism to fi ght evasion by creating an additional burden on expenses that erode the tax base, are seen as dubiously linked to corporate activity and being recorded as corporate costs, can nonetheless produce personal bene fi ts to managers, shareholders or both and also to employees.

As stated by Isa et al. (2014), taxpayers are also quite sensitive to the auditing procedures of tax authorities. Regarding the ATE, a potential development in the tax authorities’

behaviour is a lax attitude towards these expenses. The aforementioned over taxation can produce in tax auditors a feeling that ATE is enough to induce a self-control mechanism in the corporate world.

A softer tax auditing could originate a more sophisticated economic calculus among taxpayers, balancing the reduced probability of audits and corresponding adjustments, the use of such expenses as a substitute for other corporate policy choices (e.g. dividends) and the comparative tax burden of alternative avenues to take cash out the corporate structure (e.g. purely personal expenses being paid by ﬁ rms).

Basto (1998) argues that it is important to understand if ATE has a signi ﬁ cant impact on the level of tax compliance of Portuguese companies and reduces tax authorities’ monitoring role. On the other hand, one must wonder whether ATE is being used for the sole purpose of increasing tax revenues, placing a secondary role in other purported objectives.

Epps and Cleaveland (2009) suggest that speci fi c penalties can increase tax compliance of companies. It is well known that Portuguese micro and small fi rms pay almost no CIT. In this light, ATE could perform as an alternative way of taxation. It would impose on a considerable number of fi rms a minimum tax burden, increasing fairness. As micro and

Corporate income taxation in Portugal 491

(6)

small ﬁ rms rarely report pro ﬁ ts, taxing expenses would be a proxy for extracting an adequate share of revenue. However, in the Portuguese case, the so-called “special advanced payment[8]” also performs that function, and an overlapping of “minimum tax burdens” can result from different layers of taxes.

The Portuguese tax system is considered complex, volatile and unstable. Soares (2004) and Lopes (2012) state that frequent law changes, enacted in very short intervals, hamper interpretation and application, introducing high compliance costs as well as encouraging evasive behaviour. Cadilhe (2005) states that the public administration is, in general, not very ef ﬁ cient. In this light, autonomous taxes could bring tax revenue without much additional auditing or controlling effort, given its automatic nature and the absence of any link to positive taxable income, which is a variable harder to control in a tax auditing set.

The theoretical justi ﬁ cation for the introduction of ATE in the CIT Code is a very contentious issue, having generated intense discussion among authors. Mesquita (2014) states that it renders the CIT an incoherent tax, by inserting a sort of parallel taxation, disconnected from income. Santos and Martins (2009) venture that the expansion of ATE is a serious concern because it goes against fundamental principles of income taxation.

However, as we shall see, due to budgetary constraints, a valid alternative for its immediate replacement is not probably in sight.

At the international level, taxing expenses in the context of corporate taxation is not a usual policy tool. Thus, besides having a list on non-deductible costs – as regularly found in other countries adopting CIT – Portugal imposes an additional tax penalty on a broad set of expenses, by taxing them autonomously. Based in our analysis, only Angola and Cape Verde (countries in ﬂ uenced by Portuguese legal tradition) have an approximate application of the concept of ATE. Similar tools, namely, in France and in the United Kingdom, were used as exceptional measures, not as permanent features of CIT, to discourage, by overtaxing, some expenses.

Portugal can be seen as an outlier country in using this policy. To sum up, given the economic and legal issues raised by ATE, it is a topic that merits discussion. As a source of revenue that is relatively insensitive to the economic cycle, it may have some appeal to policy makers, and similar solutions could be designed based on ATE.

3. Methodology

The methodology used in the paper is a blend of legal research method and case study analysis. According to van Hoecke (2011), the legal research method takes many forms.

Here, the so-called evaluative approach is the chosen perspective. We discuss if an apparently anomalous type of rules (inserting ATE in the legal body of CIT) is justi ﬁ ed by technical, political or other underlying reasons. Also, how it relates to comparative ways of approaching the complex issue of taxing corporations.

As van Hoecke (2011) argues, the legal research method is often criticized by not making the empirical sciences’ type of generalizations. There are no “general valid principles”

derived from legal research, since many problems are, by nature, related to national legal systems and, therefore, proposed solutions are not testable outside a particular territorial or political boundary.

The monist view of science, where only empirically (falsi ﬁ able)-based research is considered to be the basis of science, is debateable. In the case of legal research, a hermeneutic approach – meaning that documents, texts and their interpretation can produce important fruits to the development of the ﬁ eld – is a tested and fruitful approach.

Besides being a hermeneutic discipline, it is an argumentative one. By exposing arguments that con ﬁ rm or deny particular solutions, legal research (e.g. in criminal,

IJLMA 59,4

492

(7)

business or administrative law) can in ﬂ uence better legislative choices by political actors.

Finally, legal research can have an empirical sense. A legal proposition can, in many contexts, be tested with standard statistical methods. In some cases, the thorny question is access to data. This is often observed in tax law studies, where governmental bodies (such as the tax authorities) have a tremendous amount of data, but its accession is constrained by law or bureaucratic secrecy (Kleinbard, 2015).

Turning to the issue, our goal is to discuss the research questions identi ﬁ ed at the beginning the paper. Thus, the interpretation of legal texts and the ratio legis discussion (hermeneutical side), the evaluation of advantages and disadvantages of autonomous taxes (argumentative approach) and the use of aggregate data to gauge an impression of ATE’s impact in global tax revenue (empirical side) will, jointly, be used to analyse the topic proposed.

On the other hand, the case study method has been used in many research areas (Scholz and Tietje, 2002). It is an extremely useful tool in responding to questions such as “how” or

“why”, when knowledge about an issue is reduced. It is considered an appropriate tool to increase knowledge about a certain problem, contributing to its understanding and, ultimately, also for making better decisions. Taking into account the aim of this study, the discussion of a Portuguese-speci ﬁ c feature of corporate taxation can highlight useful policy points to a broader audience. Many OECD countries face a dire situation in public ﬁ nances.

Therefore, given the pressure to increase tax revenues, the ATE can be a case study on how a (albeit distortive) solution is being applied in an EU country to signi ﬁ cantly enhance corporate-related tax revenue.

4. Corporate taxation and its importance as a source of tax revenue

Before facing the set of research questions outlined in this paper, it is important to have an understanding of CIT’s relevance in Portugal and other EU countries. Its contribution to total revenue in the face of recent trends of rate reduction and the shrinking of tax bases resulting from the economic and ﬁ nancial crisis are important issues to be addressed.

Brys et al. (2011) analysed cuts in statutory tax rates introduced by reforms in several OECD countries and concluded that they did not lead to a drop in tax burdens [evaluated by tax ratio, which measures tax revenues in relation to gross domestic product (GDP)].

According Bilicka et al. (2011), rate reduction is linked to tax competitiveness. Reduction of corporate tax rates can imply a mild loss of revenue, constraining governments’ ﬁ scal policy options. Rate reduction is, in many cases, accompanied by broadening the tax base.

Measures such as restricting depreciation schedules or scaling back investment tax credits can compensate for the loss or revenue that follows rate reductions (Kleinbard, 2015).

Table I presents data from 2000 to 2013 on the evolution of the level of tax revenue, as a percentage of GDP, among the several EU countries, selecting the ones under ﬁ nancial bail outs form the so-called troika [EU, European Central Bank (ECB), International Monetary Fund (IMF)].

It stands out that 2009 was a dif fi cult year, mainly for Portugal, Spain and Greece. A sharp drop in tax revenues is observed, and growing public de fi cits combined with high leverage in the banking, corporate and family sectors induced fi nancial assistance programmes that, in the case of Spain, were directed to the banking system. Nonetheless, in 2013 the level of tax revenues had recovered (Ireland being the exception), due to increases in the overall tax pressure in mentioned countries.

Corporate income taxation in Portugal 493

(8)

Table II presents data on the evolution of CIT revenues. Due to its pro-cyclical nature, a sharper drop was expected. Not only in 2009, but given that loss carry over rules are a usual feature of CIT, the subsequent years are negatively affected by heavy losses many ﬁ rms faced in 2009.

The impact of the economic crisis on tax revenues was higher in Spain, where revenues from taxing corporate income declined continuously from 4.8 per cent in 2007 to around 2 per cent in 2013.

In Portugal, a signi ﬁ cant decrease is observed in 2009, but a recover in CIT revenues follows, and, in 2013, it has almost reached pre-crisis levels.

Nabais (2013) states that ATE helps to explain why the drop in tax revenues was not as sharp as in other countries. This is another important reason why the role of autonomous taxation in the Portuguese system merits discussion.

5. The autonomous taxation in Portuguese tax system: legislative developments, quantitative analysis and legal discussion

5.1 Legislative developments: a synthesis

Before entering the economic and legal analysis of autonomous taxation, it is necessary to present its normative evolution. As we shall see, a progressive extension of tax base (by including an ever-increasing number of expenses) is detectable.

As mentioned earlier, the ATE was established at an early stage, by Decree-Law No. 192/

1990. At that time, it was not formally inserted in the CIT. Only in 2000, by Law 30-G/2000, was Article 69-A added to the CIT, condensing rules related to autonomous taxation.

The ATE was initially levied only on con ﬁ dential or undocumented expenses. In 1990, the tax rate on these expenses was 10 per cent. Nowadays, it is around 50 per cent of showing a strong increase.

Table II.

Corporate tax revenues in selected OECD countries(in percentage of GDP)

Year 2000 2002 2004 2006 2007 2008 2009 2010 2011 2012 2013

Greece 3.96 3.25 2.87 2.61 2.43 2.44 2.38 2.41 2.11 1.12 –

Ireland 3.62 3.56 3.44 3.64 3.25 2.71 2.32 2.40 2.20 2.30 2.45

OECD (average) 3.36 3.02 3.17 3.65 3.66 3.37 2.74 2.81 2.91 2.88 –

Portugal 3.69 3.25 2.81 2.83 3.46 3.51 2.75 2.73 3.14 2.73 3.22

Spain 2.99 3.02 3.38 4.04 4.54 2.70 2.15 1.75 1.70 2.04 2.02

Sources: OECD (2015), Tax on corporate proﬁts (indicator). Available at: http://dx.doi.org/10.1787/

d30cc412-in; Revenue Statistics: Comparative tables Table I.

Evolution of tax ratio in selected OECD countries(in percentage)

Year 2000 2002 2004 2006 2007 2008 2009 2010 2011 2012 2013

Greece 33.15 32.37 29.97 30.35 30.93 31.16 29.56 31.08 32.49 33.71 33.51 Ireland 30.89 27.45 29.17 31.01 30.43 28.57 27.00 26.76 26.67 27.26 28.29 OECD (average) 34.31 33.58 33.44 34.13 34.16 33.61 32.66 32.83 33.27 33.73 34.13 Portugal 30.57 30.79 29.67 30.73 31.33 31.29 29.49 30.04 32.02 31.19 33.44 Spain 33.38 33.31 34.16 35.98 36.41 32.23 29.83 31.44 31.22 32.05 32.58 Sources: OECD (2015), Tax revenue (indicator). Available at: http://dx.doi.org/10.1787/d98b8cf5-en;

Revenue Statistics: Comparative tables

IJLMA 59,4

494

(9)

A complete reference to all legislative developments observed between 1990 and 2015 would not only be extremely tedious for the reader to follow, but would also render this section quite complex to organize by introducing an excessive number of legal details. Thus, we opted for presenting, in Tables III and IV, the present situation (2015) of ATE’s legal focus.

The point worth stressing is the very signi ﬁ cant increase in ATE’s taxable base and, also, applied tax rates.

Certain expenses incurred by entities subject to CIT are subject to autonomous taxation at the rates shown in Table III.

Table III con fi rms the extension of ATE as well as the diversity of tax rates, which varies between 5 and 70 per cent. Moreover, the tax rates could increase by 10 per cent more if Portuguese business suffers fi scal losses, that means ATE tax rates can arrive to 80 per cent of eligible expenses. Actually, from a single type of expenses in 1990, it grew to encompass a signi fi cant number of corporate recorded costs in 2015. The continuous increase in ATE revenues, presented in the next section, is a logical consequence of base broadening. Bearing in mind that, in 2015, the statutory CIT was 21 per cent, the large majority of tax rates in Table III are quite onerous, imposing a considerable burden to the expense base subjected to autonomous taxes.

Additionally, and from a tax/management perspective, ATE was used as an environmental tax policy tool on vehicle acquisition decisions. In fact, from January 2015, the autonomous taxation rates applied to expenses related with passenger vehicles, commercial vehicles and motorcycles are the following (Table IV).

In conclusion, management decisions, such as when to incur non-documented expenses (that could be on the borderline of licit and illicit costs), to pay dividends to some particular entities, to support recreational expenses (again on the frontier between

Table III.

Targeted expenses and Portuguese tax rates in ATE, 2015

Expenses Tax rate (%)

Expenses related to particular or individual vehicles, commercial vehicles and motorcycles

(see alsoTable IV) 10/27.5/35

Representation expenses 10

Non-documented expenses 50/70

Payments made to entities resident in low-tax jurisdictions 35/55 Allowances and travelling costs, incurred by the employees, using own vehicles, not charged

to customers 5

Costs with compensation of damages resulting from contract termination of managers or

board members 35

Costs with bonus and other variable remunerations paid to managers 35 Proﬁts distributed to entities wholly or partially exempted from CIT 23

Table IV.

Tax rates of ATE for vehicles’related expenses, in 2015

Autonomous taxation Plug-in hybrids (%) LPG or VNG (%) Others (%)

Acquisition price lower thane25,000 5 7.5 10

Acquisition price betweene25,000 ande35,000 10 15 27.5

Acquisition price equal to or higher thane35,000 17.5 27.5 35

Notes:LPG = liqueﬁed petroleum gas; VNG = vehicle natural gas

Corporate income taxation in Portugal 495

(10)

true corporate costs and personal bene fi ts) or to choices in asset acquisition prices, were clearly affected by an important fi scal and fi nancial factor: ATE.

5.2 Extending the autonomous taxation of expenses and its impact on tax revenues: an indispensable source of revenue?

The Table V exhibits data on the evolution of revenues from the “assessed CIT” (that is, the regular income tax charged on companies’ taxable pro ﬁ ts) and also form the ATE.

The resilience of ATE revenues stands out, even in 2009 and afterwards. As expected, CIT shows a sharp drop after 2007, but ATE grows from representing 6.4 per cent of assessed CIT, in 2005, to 15.2 per cent, in 2012.

Thus, tax policy directed to the corporate sector that starts from the premise that ATE is a “ fi scal anomaly” and should be eliminated has to ponder how to replace such a relevant source of revenue. Changing depreciation schedules or reducing tax bene fi ts are potential avenues, but they will originate fi erce resistance from taxpayers.

Additionally, as stated in the Report of the Commission for the CIT Reform (2013), the Portuguese business sector is composed by more than 99 per cent for small and medium enterprises (SMEs) and, in 2011, 74 per cent of the almost 420,000 existing companies did not pay CIT. ATE is thus a type of tax burden seen as a proxy for countering evasive behaviour that is thought to happen is this business segment. Therefore, exploring the role of ATE as a measure to combat tax evasion could be an interesting research line. Given that tax evasion is thought to be signi ﬁ cantly linked to the underground economy, Table VI presents the evolution of non-observed economy (NOE) in Portugal.

Nowadays, in Portugal, NOE assumes a constant and high level, around 20 per cent of GDP. However, as we have already shown before, in Table II, the Portuguese corporate tax

Table VI.

Non-observed economy (NOE) in Portugal as a % of GDP, 2005-2012

Year 2005 2006 2007 2008 2009 2010 2011 2012

GDP 18.469,9 19.430,5 20.466,0 20.386,3 19.719,9 20.551,1 20.321,7 20.097,9 NOE MIMIC modela^a(%) 19.47 19.23 19.07 19.13 19.90 19.60 19.32 18.96 Notes:^aThe MIMIC model adds the latest advances in general literature regarding the extension of the NOE (also called Shadow Economy), cit. Adam and Ginsburhg, 1985; Asea, 1996; Giles e Tedds, 2002, in Soares and Afonso (2016)

Sources: Available at: www.pordata.pt/DB/Europa/Ambiente+de+Consulta/Tabela; The Non-Observed Economy in Portugal: the monetary model and the MIMIC model,Soares and Afonso (2016), available at:

www.gestaodefraude.eu/wordpress/wp-content/uploads/2016/02/wp049.pdf Table V.

CIT and autonomous taxes revenues– Portugal (2005-2012)– in EUR million

Year 2005 2006 2007 2008 2009 2010 2011 2012

Assessed CIT 3.103,0 3.793,0 4.504,0 4.111,0 3.846,0 3.320,0 3.132,0 3.224,0 CIT yearly variation (%) – þ22% þ19% "9% "6% "14% "6% þ3%

Autonomous taxation (ATE) 198,0 205,0 220,0 366,0 371,0 360,0 534,0 491,0 ATE yearly variation (%) – þ3% þ7% þ66% þ1% "3% þ48% "8%

Corporate statutory rate (%) 25% 25% 25% 25% 25% 25% 25% 25%

ATE/assessed CIT revenue (%) 6.4% 5.4% 4.9% 8.9% 9.6% 10.9% 17% 15.2%

Source:Available at:http://info.portaldasﬁnancas.gov.pt/pt/dgci/divulgacao/estatisticas/estatisticas_ir/

IJLMA 59,4

496

(11)

revenues have not decreased in the last years. Thus, the relation between the ATE and the parallel economy could be a research avenue in the tax compliance level of businesses.

Thus, the ever-growing importance of ATE in terms of tax revenues makes its replacement a hard choice. It is quite probable that, for the foreseeable future, what began as an exception in (1990), formally outside the CIT code, is now a structural element of corporate taxation in Portugal.

5.3 Extending the autonomous taxation of expenses and CIT internal consistency

The question addressed in this section relates to the impact of ATE’s extension in the internal consistency of CIT. First, let us focus on what can be ventured in defence of autonomous taxation.

At the doctrinal level, the justi ﬁ cation for ATE is, according to Sanches (2007), based on the fact that the tax system can impose higher rates on certain expenses that must be discouraged. An implicit presumption exists that these expenses do not have a clear business purpose and, therefore, should be subjected to penalty taxes.

The Portuguese jurisprudence (more on this latter) generally accepts the idea of discouraging (by overtaxing) corporate practices that may involve situations of

“unlawfulness” or “lesser ﬁ scal transparency”.

The Supreme Administrative Court ruled that ATE, being a kind of indirect tax, targets certain recorded costs that reveal tax capacity (or ability to pay). Each expense is a unique autonomous taxable event, to which taxpayer is subjected, even if at the end of the year no taxable income is earned.

A strong body of doctrine is highly critical of autonomous taxes. A sceptical view posits that when the economic climate is favourable, companies have pro ﬁ ts and therefore pay taxes. When the economic environment is unfavourable, companies bear losses and should not pay taxes. CIT is – as it should be –a cyclical tax. That does not happen with the ATE, since companies pay taxes regardless of whether they had pro ﬁ ts or losses. Table V leaves no doubt about this feature of taxing costs.

This line of reasoning also states that the usual solution, found in the vast majority of countries adopting the CIT, is that the proper way of penalizing some expenses is by denying tax deductibility. That is, they represent accounting costs but not tax-deductible charges because they are deemed not entirely related to corporate activity.

Nabais (2013) argues that the CIT is slowly, but gradually, losing some of its typical characteristics, such as being a tax on corporate income or surplus. The increase of ATE scope implies a tax on the companies’ activities, disconnected form pro ﬁ t making.

Martins (2013) ventures that autonomous taxation implies a deviation from the principles underlying the taxation of income. Expenses, which are subtractive elements of net income, should not be a tax base in the sphere of income taxation. Cunha (2007) argues that there is no real justi ﬁ cation for ATE, since it has nothing to do with the income tax system.

Santos (2003) discusses whether ATE can lead to a constitutional problem because it deviates from the principle of the ability to pay, given that Article 104 of the Constitution states that ﬁ rms must be fundamentally taxed on real income.

Silva (2015) and Santos and Palma (2013) sustain that, in times of economic crisis, the increasing number of autonomous taxation induces a rise in corporate tax burden, eventually enhancing evasion and fraud.

Doubts about the insertion of ATE legal commands in the CIT Code also abound. Are autonomous expenses formally a component of CIT? Can tax bene ﬁ ts be deducted against

“Assessed autonomous taxes”? Or, albeit formally inserted in the CIT Code, are they a speciﬁc legal species, without an economic and formal link to CIT? Several litigation cases

Corporate income taxation in Portugal 497

(12)

followed from such thorny questions. To the best our knowledge, judges must grapple with highly complex legal issues because ATE is ﬁ lled and paid in the same tax return of the CIT;

but, formally, ATE is not “assessed income tax”.

We would not go so far as to argue that the Portuguese CIT has already lost its internal consistency because of ATE. However, the danger exists that, as a relatively certain source of revenue, the expense base to which they are applied could be extended. At a certain point, the CIT could become a dual tax. That is, part of it will be a tax on pro ﬁ ts, and a highly signi ﬁ cant portion of CIT-related revenue will be drawn from ATE. The dividing line is not clear cut but, at least, the ATE base should not be increased. In the future, its reduction should be considered while pondering on alternative sources of revenue.

5.4 Is the autonomous taxation of expenses constitutional?

The Portuguese Constitution, in its Articles 103 (Tax system) and 104 (Taxes), establishes the general rules that Portuguese tax legislators must follow. Two general principles are of signi ﬁ cant relevance to our analysis. First, Article 103 states that the tax system has two purposes: generating revenues to support public expenditures and contributing to a fair distribution of income and wealth. Article 104 establishes that income, consumption and wealth are the legal admissible tax bases.

More speci ﬁ cally, Article 104, § 2, states the corporate taxation will be fundamentally based on its real income (“real” meaning that the tax base cannot be an arbitrarily presumed income).

Thus, given this set of constitutional rules, and the fact the CIT Code has included the ATE, is it a violation of the “real income” principle, as far as corporations are concerned?

This special type of taxes target expenses or costs, not income. In this light, how have Portuguese courts, in particular the Constitutional Court, decided when confronted with legal questions related to ATE?

Rulings of the Constitutional Court on the ATE are not directly related to the questions of their admissibility, given what is established in Article 104, § 2. However, in several rulings[9], related to the consequences of changing tax law in mid-year and its prospective or retrospective nature, the Court dealt with the nature of autonomous taxes. Based on these rulings, our conclusion is that this ﬁ scal solution was not deemed unconstitutional.

In Ruling 18/2001, the Court states that autonomous taxes aim at ﬁ ghting tax evasion.

Additionally, the Court ruled that some taxed expenses are a substitute for (non-taxed) income received by third parties (e.g. a non-documented expense of a company could be linked to the income of other entities who did not properly record revenues) and ATE can contribute to a fairer distribution of the tax burden.

This last purpose means that as many small ﬁ rms persistently exhibit negative accounting and taxable income, the ATE would work as minimum tax, increasing the system’s level of fairness. Article 103 of the Constitution would be a legal anchor to base the autonomous taxation of some types of expenses, particularly the ones at the frontier between corporate and personal domain, or with a blurred nature (e.g. vehicle expenses).

On the other hand, there is a doctrinal discussion about the ATE being characterized as a tax on consumption. The argument goes as follows: the ability to pay in the ATE is not revealed by income, but by the realization of expenses, which means corporate consumption of goods or services.

A dissenting opinion from one judge in Ruling 18/2011 follows this line of reasoning.

This argument also sustains that the nature of income taxation is linked to a regular economic ﬂ ow that can be only revealed at the end on the economic period (usually the tax year). Contrarily, ATE originates in every single economic decision to bear these expenses.

IJLMA 59,4

498

(13)

Income taxation is global, waiting for the end of the economic period to compute the taxable base derived from total operations. Taxation of expenses is speci ﬁ c and consumption oriented, given that every expense originates the consequent taxation.

However, some authors highlight the fact that consumption taxes (like the value added tax (VAT) or excise taxes) have an economic consequence: the tax is a part of the ﬁ nal price paid by the consumer. This is not the case with ATE, and it would preclude its classi ﬁ cation as taxation of expenditure or consumption.

In Ruling 310/2012, the Court stated, again, that at least in some cases the ATE tries to go beyond the veil of certain economic decisions (e.g. camou fl aging pro fi t distributions with non- documented expenses, or personal expenses supported by fi rms). In the same Ruling the Court states that autonomous taxation works as if there is a presumption that some expenses have a non-corporate or business cause and should be discouraged by severe taxation.

Our conclusion is that the Portuguese Constitutional Court values the increase in fairness and the ﬁ ght against tax evasion as acceptable reasons to the insertion of ATE within the CIT Code. Also, the wording of Article 104 (fundamentally but not

“exclusively” based[. . .]) gives the Court some leeway in admitting some deviations from real income as the sole tax base, when other equally important tax principles (such as “tax equity”) are at stake.

In the case of ATE, we highlighted that all business pays the same tax rate independent of it size. In our point of view, this means that ATE taxation implies a regressive burden to small businesses. However, can use available tax mechanisms to reduce the burden of ATE.

On the one hand, small companies, in Portugal, can apply the simpli ﬁ ed tax regime to diminish ATE amount tax paid. On the other hand, big companies, with aggressive tax planning, could use some ways to reduce the burden of ATE incurred, using, for instance, permanent establishments, in other countries, without autonomous taxation. Thus, in the next section, we will present a brief international overview of ATE.

6. Taxation of expenses: a brief international perspective

As brie ﬂ y stated at the outset of this paper, Portugal is an outlier when it comes to ATE. No other OECD country has a similar source of revenue. In many countries, as already mentioned, the usual penalizing policy is to de ﬁ ne a set of non-deductible accounting expenses. However, in some Portuguese-speaking countries, ATE has recently been introduced. Also, France and the UK have an approach similar to the ATE to target some corporate expenses.

6.1 Angola and Cape Verde

In Angola, Law No. 19/2014 modi ﬁ ed the Industrial Tax (the local CIT). An ATE regime came into force on 1 January 2017. The ATE’s base is, for now, narrower than the Portuguese one.

Thus, in the Angolan CIT, improperly documented costs (when the supporting documentation only identi ﬁ es the purchaser) will be charged a 2 per cent autonomous tax rate.

Undocumented costs (when there is no valid supporting documentation), will bear a 4 per cent tax. Costs incurred for private expenses (when there is no valid supporting documentation and that their nature is not materially veri ﬁ able) will bear a rate of 30 per cent – increased to 50 per cent if the taxpayer is exempt or not subject to taxation. Donations breaching rules established by the Patronage Law will be taxed at a rate of 15 per cent.

Corporate income taxation in Portugal 499

(14)

Thus, non-documented expenses bear a 40 per cent tax rate; costs related to passenger vehicles, bikes and motorcycles, representation expenses and allowances and compensation for use of workers’ own vehicle are imposed a tax rate of 10 per cent; representation expenses are charged with 10 per cent; allowances and travelling costs, incurred by the employees, using own vehicles, not charged to clients are taxed by a 10 per cent rate; some fringe bene ﬁ ts (e.g. in kind remuneration) are taxed at 10 per cent. Finally, payments made to entities resident in low tax jurisdictions bear a 60 per cent rate.

6.2 France and the UK

France and the UK have enacted measures, similar to ATE, targeting managers’, directors’

and administrators’ compensation packages. But, differently from Portugal, they were treated as temporary measures.

In France, through the publication of Decree No. 2010-217, a 50 per cent tax rate was introduced applicable to bonuses higher than e 27.500. The main difference, compared to Portugal, was that the measure was applied retroactively to all payments made during 2009, and the tax was due in April 2010.

In the UK, by the Finance Act 2010, a 50 per cent tax rate was imposed in the form of

“bank payroll tax”, with reference to all forms of compensation and bene ﬁ ts paid to directors (and some workers develop a “regulated activity”), except for the “excluded remuneration”.

The bank payroll was a one-off tax. It comprised a rate of 50 per cent applied to bank bonuses exceeding £25,000 and charged to the employing company. It was in force in the period between 9 December 2009 and 5 April 2010.

7. Concluding remarks

The autonomous taxation of certain corporate expenses is a very special feature of the Portuguese CIT Code. Its reach has been growing since 1990, when ATE was introduced.

Tax rates have also exhibit an upward trend.

The collected revenue from ATE is already quite relevant (around 16 per cent) of regular CIT in fl ows. As such, its elimination would be dif fi cult, in face of the complex situation of Portuguese public fi nance and the need to select alternative sources of lost revenue.

At the doctrinal level, the justi ﬁ cation for autonomous taxation is usually based on the fact that a higher rate of taxation can be imposed on certain special situations that must be discouraged. An implicit presumption exists that these expenses do not have a clear business purpose and, therefore, can be subjected to penalty taxes.

CIT is as a cyclical tax, which does not happen with the ATE, since companies pay autonomous taxes regardless of whether they present pro ﬁ ts or losses. Thus, exploring the role of ATE, as a measure to combat tax evasion, could be an interesting research line, in the context of business tax compliance.

We would not go so far as to argue that the Portuguese CIT has lost its internal consistency because of ATE. However, the danger exists that, as a relatively certain source of revenue, the expense base to which they are applied could be extended. At a certain point, the CIT will have an overextended dual tax base.

The Portuguese Constitutional Court stresses the increase in fairness and the ﬁ ght against tax evasion as acceptable reasons to the insertion of ATE within the CIT Code. Also, the wording of Article 104 (fundamentally based[. . .]) gives the Court some leeway in admitting some deviations of real income as the sole tax base, when other equally important tax principles (equity) are at stake.

IJLMA 59,4

500

(15)

Portugal is an outlier when it comes to ATE. No other OECD country has a similar source of revenue. However, in some Portuguese-speaking countries, ATE has recently been introduced.

Notes

1. Non-document costs are the expenses or costs without any document that support it, such as an invoice. In 1990, when ATE were introduced in Portuguese tax system, non-document costs were called as conﬁdential expenses, which means the expenses that business taxpayers do not want to specify or show in their accountability.

2. Vehicle-related expenses include some expenses related with particular or individual vehicles, which are used for commercial purpose, such as: depreciation, rents or leasing, insurance, maintenance and repair, fuel and taxes related to ownership or use. The purpose of Portuguese policy maker was to tax some expenses related to corporate owned vehicles whose use is not limited to business purpose.

3. Entertainment expenses include all representation expenses, such as receptions, meals, trips and parties oﬀered to clients, suppliers or other persons.

4. Portuguese ATE taxes proﬁts distributed to tax-exempt entities, which means proﬁts or dividends distributed by business which are located in a special or privileged tax regime usually with low taxation. In this case, ATE taxation works as an anti-abuse tax measure.

5. Expenses incurred with the payment of compensations forﬁnal contract are under autonomous taxation when such compensation is not related to the achievement of a productivity target previously deﬁned in the labor contracts. In this case, ATE also include expenses relating to bonus and other variable remuneration paid to managers and administrators, which are taxed when they represent an amount exceeding 25 per cent of annual salary and have a value exceedinge27,500. Here, ATE taxation works as an anti-abuse tax measure.

6. Allowances and traveling costs incurred by the employees, using own vehicles, for commercial purposes, and not charged directly to business customers.

7. ATE applies to amounts paid or due to individuals or companies resident outside Portuguese country and subject to a more favorable tax regime. Also, in this case, ATE taxation works as an anti-abuse tax measure, whose purpose is to combat business tax evasion behavior.

8. The special advance payment is linked to turnover, and is reimbursable against assessed CIT. A loss-making firm, having paid the special advance payment, faces a definitive tax outflow, working as minimum tax.

9. See, for example, Ruling 18/2011, Process 202/2010, 12 January 2011; and Ruling 310/2012;

Process 150/12, 20 June 2012.

References

Allingham, M. and Sandmo, A. (1972),“Income tax evasion. a theoretical analysis”,Journal of Public Economics, Vol. 1 Nos 3/4, pp. 323-338.

Bartelsman, E.J. and Beetsma, R. (2003),“Why pay more? Corporate tax avoidance through transfer pricing in OECD countries”,Journal of Public Economics, Vol. 87 Nos 9/10, pp. 2225-2252.

Basto, J.X.D. (1998),“As perspectivas actuais de revisão da tributação do rendimento e da tributação do património em Portugal”,Boletim de Ciências Económicas, Vol. 41 No. 1, pp. 60-96.

Bilicka, K., Devereux, M. and Fuest, C. (2011),G20 Corporate Tax Ranking, Oxford University, Centre for Business Taxation, Oxford.

Brys, B., Matthews, S. and Owens, J. (2011),“Tax reform trends in OECD countries”, OECD Taxation Working Papers, No. 1, OECD Publishing.

Corporate income taxation in Portugal 501

(16)

Cadilhe, M. (2005), “O Sobrepeso do Estado em Portugal”, Uma Proposta de Reforma Conceitual e Administrativa, FUBU Edições, Lisboa.

Cunha, P.d.P.e. (2007),“A pseudo-reformafiscal dofinal do século XX e o regime simplificado do IRS”, Revista de Finanças Públicas e Direito Fiscal, Vol. 1 No. 2, pp. 15-34.

Devereux, M.P., Grifﬁth, R. and Klemm, A. (2002),“Corporate income tax reforms and international tax competition”,Economic Policy, CEPR, CES, MSH, p. 46.

Diamond, J. and Zodrow, G. (2013),The CASE for Corporate Income Tax Reform, Rice University Baker Institute for Public Policy, Houston, TX.

Epps, K.K. and Catherine Cleaveland, M. (2009), “Insiders’ perspectives of the effects of recent regulation on corporate taxation”,Research in Accounting Regulation, Vol. 21 No. 1, pp. 34-47.

European Commission (2011),“Proposal for a council directive on a common consolidated corporate tax base (CCCTB)”, European Commission, Brussels, COM 2011- 12/4.

Fochmann, M., Kiesewetter, D. and Sadrieh, A. (2012),“Investment behavior and the biased perception of limited loss deduction in income taxation”,Journal of Economic Behavior and Organization, Vol. 81 No. 1, pp. 230-242.

Hristu-Varsakelis, D., Karagianni, S. and Saraidaris, A. (2011), “Equilibrium conditions in corporate tax competition and foreign direct investment ﬂows”, Economic Modelling, Vol. 28 Nos 1/2, pp. 13-21.

Isa, K.M., Yussof, S.H. and Mohdali, R. (2014),“The role of tax agents in sustaining the malaysian tax system”,Procedia–Social and Behavioral Sciences, Vol. 164, pp. 366-371.

Kleinbard, E. (2015),We are Bettrer Than This, Oxford University Press, Oxford.

Lopes, C. (2012),“Compliance costs of corporate income taxation in Portugal”,International Journal of Economics and Management Sciences (Online Journal), Vol. 1 No. 10, pp. 2162-6359.

Martins, A. (2013),“Casino taxation in Portugal: the supreme court and autonomous taxes”,Gaming Law Review and Economics, Vol. 17 No. 3, pp. 195-203.

Mesquita, M. (2014), “A tributação autónoma no CIRC”, Tese de Mestrado, Universidade Católica, Porto.

Mirrlees, J., Adam, S., Besley, T., Blundell, R., Bond, S., Chote, R., Gammie, M., Johnson, P., Myles, G.

and Poterba, J. (2011),Tax by Design: the Mirrlees Review, Oxford University Press for Institute for Fiscal Studies, Oxford.

Mohdali, R., Isa, K. and Yusoff, S.H. (2014),“The impact of threat of punishment on tax compliance and non-compliance attitudes in Malaysia”, Procedia – Social and Behavioral Sciences, Vol. 164, pp. 291-297.

Nabais, J. (2013), “A determinação da matéria tributável no IRC”, Revista de Finanças Públicas, Tributação e Desenvolvimento, No. 1, pp. 1-25.

Osterloh, S. and Heinemann, F. (2013),“The political economy of corporate tax harmonization–why do european politicians (dis)like minimum tax rates?”, European Journal of Political Economy, Vol. 29 No. C, pp. 18-37.

Richardson, G. (2006), “Determinants of tax evasion: a cross-country investigation”, Journal of International Accounting, Auditing and Taxation, Vol. 15 No. 2, pp. 150-169.

Sanches, J.L.S. (2007),Manual de Direito Fiscal, Coimbra Editora, Coimbra.

Santos, A.C. and Martins, A.M.F. (2009), “Relatório do Grupo para o Estudo da Política Fiscal:

Competitividade, Eﬁciência e Justiça do Sistema Fiscal”, Secretaria de Estado dos Assuntos Fiscais, Ministério das Finanças, Lisboa.

Santos, A.C. and Palma, C.C. (2013),“Conﬁança legítima e da não retroatividade das normas tributárias em tempos de crise: o caso Português”,Revista Do Instituto Do Direito Brasileiro, Vol. 2 No. 4, pp. 3147-3182.

IJLMA 59,4

502

(17)

Santos, J.A. (2003),Teoria Fiscal, I. Universidade Técnica de Lisboa,Lisboa.

Scholz, R. and Tietje, O. (2002),Embedded Case Study Methods, Sage Publications Ltd, London.

Silva, A.J.A. (2015),“As tributações autónomas: notas técnicas e práticas para estudo”,Revista TOC, Ano XV, No. 2, 39-41.

Slemrod, J. (2004),“Are corporate tax rates, or countries, converging?”, Journal of Public Economics, Vol. 88 No. 6, pp. 1169-1186.

Soares, D.D. (2004),Percepção Social da Fiscalidade em Portugal, Almedina, Coimbra.

Soares, C. and Afonso, O. (2016),“The non-observed economy in Portugal: the monetary model and the MIMIC model, Edições Húmus”, 1.a edição, ISBN: 978-989-755-191-8,OBEGEF–Observatório de Economia e Gestão de Fraude, Faculdade de Economia da Universidade do Porto.

Van, H.M. (2011),Methodologies of Legal Research, Hart Publishing, Oxford and Portland.

International Journal of Law and Management