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The computation of taxable income when accounting numbers are not reliable: A note on presumptions

António Martins (School of Economics, University of Coimbra, Coimbra, Portugal)
Cristina Sa (School of Technology and Management, Polytechnic Institute of Leiria, Leiria, Portugal)

International Journal of Law and Management

ISSN: 1754-243X

Article publication date: 12 March 2018



The purpose of this paper is to discuss the causes that justify the application of presumptions in corporate income taxation. The authors focus on motives showing a connection to errors or fraud in the recognition of operations by the financial accounting system. The research question can be framed as follows: How to define the frontier between reliable accounting records and unreliable information, the latter rendering presumptions as an admissible way of taxing income?


The research design of this paper rests on two analytical steps based on the legal research method. The first step enquires, at the accounting level, how to define and quantify errors that render accounting statements inappropriate to assess firms’ performance and compute taxable income. The second step explores the practical application of presumptive tax concepts by Portuguese courts, to offer some criteria that can function as guidelines to firms and tax auditors.


The judgment about the boundaries of accounting errors that allow the use of presumption-based taxation is often decided by litigation. Portuguese jurisprudence provides strong evidence that presumptions should only be applied if, even by correcting of errors and inaccuracies, corporate real income cannot be obtained. The level of contamination must be obvious, and tax audits must present a strong and documented claim that presumptions are a last-resort mechanism to compute an appropriate tax base. The Supreme Tax Court has been applying a consistent approach characterized by: presumptive taxation is a last-resort mechanism; tax audits must prove that a generalized contamination of accounting data is observed; it is not possible to correct accounting errors, given their extension and depth, and the taxpayer did not submit contradictory solid evidence.

Practical implications

Applying, in practice, legal criteria to decide that accounting manipulation is so extensive that taxation must be based on presumptions is fraught with subjectivism. However, we offer an analysis where some guidelines to this complex issue are presented in a logical way. Principles-based taxation can, nonetheless, be applied with a significant degree of fairness and consistency.


The paper contributes to the literature by offering an analysis of the criteria used by Portuguese tax courts when deciding that accounting data can be disregarded and presumptions used as a tax computation tool. Given that the rule, in many countries, is to base taxable income on accounting records (albeit with adjustments established in Corporate Income Tax Codes), presumptions are a notable exception to this well-established rule. As such, taxpayers have a significant interest in knowing how courts rule on tax authorities’ use of presumptions. In this light, the paper has also potential value to professionals in the accounting and tax fields. They are often confronted with tax audits that apply presumptions. Therefore, knowing jurisprudential trends in the judgment of such, usually complex, cases is an important issue.



Martins, A. and Sa, C. (2018), "The computation of taxable income when accounting numbers are not reliable: A note on presumptions", International Journal of Law and Management, Vol. 60 No. 2, pp. 543-562.



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