Process: 10/2018-T

Date: September 12, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 10/2018-T) addresses multiple challenges to an IRS withholding tax assessment issued following a tax inspection of a defunct medical services company. The taxpayer contested assessment No. 2016... for €111,219.25 relating to 2012, raising five main grounds: nullity of notification under Article 36(2) CPPT leading to statute of limitations expiry; absence of proper withholding tax assessment; lack of substantiation (fundamentação) under Article 77 LGT; failure to grant prior hearing (audiência prévia) before assessing compensatory interest under Article 60 LGT; and duplicate collection. The company had ceased operations in October 2012 and was subject to inspection in 2016 regarding IRS withholdings on capital income distributions. The Tax Authority defended the assessment on procedural grounds through objection. The tribunal's analysis focused on whether the notification met legal requirements under Articles 36 and 39 CPPT, whether the assessment contained adequate legal grounds as mandated by Article 77 LGT and Article 268 CRP, and whether procedural rights were respected. The case illustrates critical issues in Portuguese tax procedure: the formal requirements for valid tax notifications, especially for electronic delivery; the substantiation duty requiring tax authorities to explain the legal and factual basis for assessments; the constitutional and statutory right to prior hearing before additional charges like compensatory interest; and the application of statute of limitations rules under Article 45 LGT when notification defects exist. These procedural safeguards are fundamental to taxpayer protection in Portuguese administrative tax law.

Full Decision

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Ana Teixeira de Sousa and Álvaro Caneira, appointed by the Ethics Council of the Centre for Administrative Arbitration to form an Arbitral Tribunal, hereby decide as follows:

I – REPORT

On 4 January 2018, A..., LDA., Tax Identification Number ..., with registered office at Rua ... ..., Lisbon, filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by Article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking a declaration of illegality of the assessment act for withholding tax on income and compensatory interest No. 2016..., relating to the year 2012, in the amount of €111,219.25.

To support its claim, the Claimant alleges, in summary:

  • The nullity of the notification, pursuant to Article 36, paragraph 2 of the CPPT, Article 39, paragraph 12 of the CPPT and Article 114, paragraph 2, letter b) of the CPA, and, consequently, the expiration of the right to assess tax, in light of Article 45 of the LGT;

  • The absence of assessment of withholding tax on income, pursuant to Article 161, paragraph 2, letter g) of the CPA and Article 36 of the CPPT;

  • The lack of substantiation of the assessment, pursuant to Article 36, paragraph 2 of the CPPT, Article 77 of the LGT, Article 153, paragraph 1 of the CPA and Article 268 of the CRP;

  • The failure to provide the right to be heard before the assessment of compensatory interest, pursuant to Article 60, paragraph 1, letter a) of the LGT;

  • Duplication of collection.

On 05-01-2018, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.

The Claimant did not nominate an arbitrator, wherefore, pursuant to letter a) of paragraph 2 of Article 6 and letter a) of paragraph 1 of Article 11 of the RJAT, the President of the Ethics Council of CAAD appointed the signatories as arbitrators of the collective arbitral tribunal, who communicated their acceptance of the appointment within the applicable period.

On 20-02-2018, the parties were notified of these appointments, and neither expressed the intention to refuse any of them.

In accordance with the provisions of letter c) of paragraph 1 of Article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 12-03-2018.

On 24-04-2018, the Respondent, duly notified for that purpose, filed its defence based solely on objection.

Having been notified for that purpose, the Respondent attached to the case file the administrative procedure file and documents, in accordance with what it had stated in its defence.

By order dated 07-05-2018, the Claimant was notified to exercise its right to reply regarding the documentation submitted by the Tax Authority.

By petition dated 21-05-2018, the Claimant filed a "response to the objection" of the Tax Authority.

By petition dated 25-05-2018, the Tax Authority opposed said petition, requesting its removal from the file.

By order of 01-06-2018, it was deemed that the petition of 21-05-2018 had no procedural relevance and was prohibited, pursuant to Article 130 of the CPC, and its removal from the file was ordered.

In the same order, and pursuant to letters c) and e) of Article 16 and paragraph 2 of Article 29, both of the RJAT, the holding of the meeting referred to in Article 18 of the RJAT was waived, and a period was granted for the parties to submit written submissions, and it was also indicated, pursuant to Article 18/2 of the RJAT, that the final decision would be issued by the deadline fixed in Article 21/1 of the RJAT.

By petition dated 05-06-2018, the Claimant requested the "annulment" of said removal order, which was dismissed by order of 06-06-2018.

The parties submitted written submissions, commenting on the evidence produced and reiterating and developing their respective legal positions.

The Arbitral Tribunal is materially competent and is duly constituted, pursuant to Articles 2, paragraph 1, letter a), 5 and 6, paragraph 1, of the RJAT.

The parties have legal personality and capacity, are legitimate and are duly represented, pursuant to Articles 4 and 10 of the RJAT and Article 1 of Ordinance No. 112-A/2011, of 22 March.

The proceedings are not affected by any nullities.

Thus, there is no obstacle to the consideration of the case.

Having considered everything, it is necessary to deliver

II. DECISION

A. FACTUAL MATTERS

A.1. Facts Established as Proven

  • The Claimant is a defunct commercial company that operated until 24-10-2012 in the activity of "Provision of medical services in the areas of ophthalmology and radiology".

  • The Claimant was classified, for corporate income tax purposes, under the general regime for determining taxable income and, for VAT purposes, under the exemption regime.

  • The Claimant ceased activity for VAT purposes on 27-07-2012 and, for corporate income tax purposes, on 24-10-2012, the date of closure of liquidation.

  • The Claimant was subject to an internal inspection action, of limited scope, pursuant to Service Order No. 2016..., which had the purpose of controlling operations related to the assessment and distribution and respective withholding of personal income tax, in relation to the tax period of 2012.

  • The Claimant was notified of the draft inspection report and, if it so wished, to exercise the right to be heard, by letter No. ... of 17-06-2017.

  • On 04-07-2016, the Claimant, through B..., in the capacity of representative of cessation, exercised its right to be heard.

  • In exercising the right to be heard, the Claimant raised, among others, the following:

[Content of right to be heard statement omitted in original]

  • The final inspection report was notified to the Claimant on 17-08-2016.

  • The final inspection report contains the following:

[Content of final inspection report omitted in original]

  • The Claimant's arguments were partially accepted, and the Tax Inspection concluded that the taxpayer should submit the personal income tax withholding guide, relating to income from capital, with reference to October 2012, in the total amount of tax of €96,737.75, wherefore the correction of the amount of tax due proposed in the draft report was made, in a total of €10,200.00 in favour of the Claimant.

  • Following the inspection action, on 06-09-2016, the assessment of withholding tax on income and respective compensatory interest No. 2016... was issued.

  • The Claimant was notified of the assessment of withholding tax on income and the respective statement of compensatory interest via electronic means, through the document identified by the code ID.DOC.FFCC-..., delivered to the electronic mailbox of ViaCTT.

  • Said notification contains the following text:

[Content of notification omitted in original]

  • On 01-02-2017, the Claimant filed a complaint for administrative reconsideration.

  • On 28-09-2017, the Claimant was notified of the decision dismissing the complaint for administrative reconsideration.

A.2. Facts Established as Not Proven

With relevance to the decision, there are no facts that should be considered as not proven.

A.3. Substantiation of Proven and Not Proven Factual Matters

With regard to the factual matters, the Tribunal does not have to pronounce on everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to distinguish the proven factual matters from the not proven ones (cf. Article 123, paragraph 2, of the CPPT and Article 607, paragraph 3 of the CPC, applicable by virtue of Article 29, paragraph 1, letters a) and e), of the RJAT).

Thus, the facts relevant to the judgment of the case are selected and delineated according to their legal relevance, which is established in light of the various plausible solutions to the legal question(s) (cf. former Article 511, paragraph 1, of the CPC, corresponding to current Article 596, applicable by virtue of Article 29, paragraph 1, letter e), of the RJAT).

Therefore, taking into account the positions adopted by the parties, in light of Article 110/7 of the CPPT, the documentary evidence and the administrative procedure file attached to the case file, the facts listed above were considered proven, with relevance to the decision, taking into account that, as stated in the Decision of the Administrative Court of Southern Region of 26-06-2014, rendered in case 07148/13, "the probative value of the tax inspection report (...) may have probative force if the assertions contained therein are not disputed".

No determinations were made as to facts alleged by the parties and presented as facts, consisting of strictly conclusive statements, incapable of proof and whose truthfulness must be assessed in relation to the concrete factual matters above established.

B. LAW

i.

The Claimant begins by arguing the nullity of the notification of the assessment to be executed, pursuant to Article 36, paragraph 2 of the CPPT, Article 39, paragraph 12 of the CPPT and Article 114, paragraph 2, letter b) of the CPA, and, consequently, the expiration of the right to assess tax, in light of Article 45 of the LGT.

The provisions referred to are as follows:

Article 36, paragraph 2 of the CPPT:

"Notifications shall always contain the decision, its grounds and means of defence and time limit to react against the notified act, as well as the indication of the entity that issued it and whether it did so in the exercise of delegated or subdelegated powers."

Article 39, paragraph 12 of the CPPT:

"The act of notification shall be null in the event of failure to indicate the author of the act and, in the event that it was issued in the exercise of delegated or subdelegated powers, the capacity in which it decided, its meaning and its date."

Article 114, paragraph 2, letter b) of the CPA

"2 - The notification of the administrative act must contain: (...)

b) The identification of the administrative procedure, including the indication of the author of the act and the date thereof;"

The Claimant believes that "In the case before us, the 'author of the act' is not indicated".

With all due respect, the Tribunal finds that the Claimant has no basis for this argument.

In fact, and as is evident from the facts established as proven, the author of the act is clearly identified as 'C... '.

According to the Claimant, "we have 3 acts: 1) the act of 'notification', whose author is 'C... '; 2) the act of 'Assessment' of withholding tax on income, whose author is not indicated; and, 3) the act of 'Assessment' of compensatory interest, whose author is also not indicated." In this context, the Claimant believes "that only the 'notification' can be attributed to 'C... ' (n)othing preventing its author from being different."

With all due respect, the Tribunal believes that the position of Cartesian doubt assumed by the Claimant has no basis. In fact, if nothing prevents the author of the 3 acts identified by the Claimant from being different, it is equally true that nothing prevents them from being the same.

Now, like everything else in Law, the question under review must be approached from the perspective of reasonableness and normality, in light of which, nothing indicating that the author of the 3 acts listed by the Claimant is not the identified person who signs them, nothing would justify that, for a reasonable recipient, it would not be clear that this person is the author of the same.

The Claimant also alleges that "even if it were considered that 'C... ' was the author of the assessment, the fact remains that nothing is said about the capacity in which the same acted, its professional category, nor is it clarified whether the same would belong to the Tax and Customs Authority".

Again, only from the perspective of methodical doubt would it be understandable that it cannot be concluded that, being an act produced in a document belonging to the Tax Authority, notified via registered mail, which, as the Respondent points out, is for the exclusive use of the Tax Authority, the person who signs it would, in light of criteria of normality, belong to the Tax and Customs Authority.

As regards the capacity in which the person who signs acted, and its professional category, whilst it is true that this does not expressly result from the notified act, it is equally true that such aspects are matters of public knowledge and have been published in the Official Journal, in addition to being also publicized on the Tax Authority's website.

In this way, it cannot be deemed unreasonable to expect that the Claimant knew that the person signing the tax acts addressed to it not only belonged to the Tax and Customs Authority, but was its Director-General.

Furthermore, in any case, the interpretation put forward by the Claimant, according to which the requirement to identify the author of the act entails the need to indicate the office that it holds, cannot be endorsed.

In fact, once the person who issued the act is identified – as is the case – its recipient is in possession of the necessary elements to determine whether the same had, or did not have, competence to issue it.

Nor can the Tribunal endorse the interpretation of the Claimant according to which "if Article 39, paragraph 12 of the CPPT prohibits that an act issued in the exercise of delegated or subdelegated powers lack the indication of the capacity in which its author decided, under penalty of nullity of the notification, then, a minori ad maius, the same legislator would also not allow that in any act, even if issued in the exercise of its own powers, there would lack the indication of the capacity or category of the author."

In fact, such an interpretation, with all due respect, would lack any foundation, not least because if that were the legislator's purpose, it would not have restricted the need to indicate the capacity of the author of the act to "the event that it was issued in the exercise of delegated or subdelegated powers", but would have simply provided that, in all cases (which is what the Claimant proposes) such indication was necessary.

Furthermore, and contrary to what the Claimant argues, the principle a minori ad maius is not applicable. With all due respect, said reasoning is fallacious, being equivalent to saying, for example, that, since a minor cannot enter into legal transactions, a major cannot do so either, or that, since a representative cannot perform acts exceeding the mandate, a representative also cannot do so...

With regard to the case law cited by the Claimant, it is considered that the same is not transposable to the present case, because the factual situations underlying it are not identical, and in one case it involved an act issued by the Tax Office of ..., which should have been issued by the central services of the Directorate-General for Taxes, and in the other it was held that "acts issued in SIPA only bind the Tax Administration if they can be attributed to any holder of an office of the same", which was not the case in that situation, contrary to the present case, in which the act can be attributed to the Director-General of Taxes.

Therefore, in the absence of any of the alleged nullities in the notification in question in the case file, the also alleged expiration of the right to assess, should not occur, and the arbitral claim should be dismissed on this part.

ii.

Next, the Claimant alleges the absence of assessment of withholding tax on income, pursuant to Article 161, paragraph 2, letter g) of the CPA and Article 36 of the CPPT.

The aforementioned provisions provide that:

Article 161, paragraph 2, letter g) of the CPA:

"2 - Are, in particular, null:

g) Acts that completely lack legal form;"

Article 36 of the CPPT:

"1 - Tax acts that affect the rights and legitimate interests of taxpayers only produce effects in relation to them when validly notified to them.

2 - Notifications shall always contain the decision, its grounds and means of defence and time limit to react against the notified act, as well as the indication of the entity that issued it and whether it did so in the exercise of delegated or subdelegated powers."

To this end, the Claimant alleges that "in the alleged or purported 'Assessment' (the alleged or purported 'notified act'), there is no mention of the assessed 'tax', there is no mention of any taxable matter or amount on which the rate should be applied (...) nor is any withholding tax rate referred to (...) no reasons of fact and law are provided (...) it contains no reference to the tax provision, applicable tax rate and respective taxable matter or amount to which it would apply (...n)othing is said about whether the purported 'Assessment' is official, that is, if it arises in the absence of any Assessment previously made by the taxpayer (o)r if, differently, the 'Assessment' is additional, correcting only an Assessment previously made by the taxpayer (...) it is not communicated to the recipient of the notification whether the withholding at source has the nature of payment 'on account of the tax due finally' (o)r rather payment as a 'definitive payment' (...) who are the respective beneficiaries of the income allegedly paid by the company and on which the duty to withhold income tax would apply".

The Claimant thus concludes that there is no assessment act, and therefore "the aforementioned 'Assessment No. 2016...' was never notified to company A..., Lda."

With regard to this issue, it should be noted from the outset that no basis can be discerned for the Claimant's allegation that there is no mention of the assessed 'tax', and other allegations arising from this, to the extent that the notified act expressly states that the amount determined is derived "from withholding of personal income tax".

On the other hand, it should also be noted that it is the Claimant itself which previously recognizes, and as has already been seen, that the notification made to it contains "3 acts: 1) the act of 'notification' (...) 2) the act of 'Assessment' of withholding on income tax (...) and, 3) the act of 'Assessment' of compensatory interest".

Finally, it should be noted that if the Claimant's claim that no assessment exists were to be accepted, the present arbitral action would lack an object and should be dismissed for the original futility of the action, since its object is precisely the assessment act, whose validity depends, among other things, on its existence, and the appropriate means of challenging non-existent acts is opposition to the respective enforcement acts.

As for the other indications pointed out by the Claimant, as stated in the Decision of the Administrative Court of Southern Region of 29-09-2009, rendered in case 03041/09:

"3. The notification act is not to be confused with the notified assessment act, with the provision of Article 36, paragraph 2 of the CPPT containing the mandatory indications as to the notified act, whose omissions or insufficiencies are, as a rule, curable pursuant to paragraph 1 of Article 37 of the same Code;

  1. And the provision of Article 39, paragraph 9 (current numbering) of the same Code contains the mandatory indications as to the notification act itself, whose omission or insufficiency, as a rule, leads to its nullity."

As the issue of the nullity of the notification has already been considered, it remains to consider the question of the sufficiency or insufficiency of the indications pointed out by the Claimant, a question that intersects with the consideration of the existence, or otherwise, of substantiation of the assessment, as the Claimant itself also appears to understand, when referring to "such 'crucial elements' are omitted in the purported assessment, nor is there any reference in it to a previous procedural document, as will be shown later."

Therefore, and as stated in the Decision of the Supreme Administrative Court of 22-01-2014, rendered in case 01108/13, "the notification of the assessment act that does not contain the substantiation of fact and law, but contains the indication of the term for voluntary payment, makes that act effective and the debt therein determined enforceable."

Therefore, the absence or presence of the indications pointed out by the Claimant, as well as the consequences arising therefrom, cannot disregard the assessment of the existence and scope of the substantiation of the tax act in question, which will now be considered.

iii.

The Claimant then alleges that there is a lack of substantiation of the assessment, pursuant to Article 36, paragraph 2 of the CPPT, Article 77 of the LGT, Article 153, paragraph 1 of the CPA and Article 268 of the CRP.

As is well known, substantiation is a requirement of tax acts in general, being a constitutional obligation (Article 268 of the CRP) and a legal one (Article 77 of the LGT).

In summary, it can be said that it is today settled in both national doctrine and case law that the required substantiation must have the following characteristics:

  1. Officioseness: it must always be initiated by the administration, and substantiation at the request of the taxpayer is not admissible;

  2. Contemporaneity: it must be contemporaneous with the issuance of the act, and delayed substantiation is not permitted;

  3. Clarity: it must be understandable to a reasonable recipient, avoiding polysemous or highly technical concepts;

  4. Completeness: it must contain all the essential elements and those that were determinative of the decision made. This characteristic is divided into two requirements, namely: the duty of justification (legal norms and factuality – domain of legality) and motivation (domain of discretion or opportunity, when an assessment is required).

Now, if substantiation is, in the terms referred to, necessary and obligatory, this cannot and should not be understood in an abstract and/or absolute manner, that is, the substantiation required of a specific tax act should be that which is functionally necessary for it not to be presented to the taxpayer as a pure demonstration of arbitrariness. This will – it is believed – be the touchstone of compliance with the duty of substantiation: to the extent that, before a reasonable recipient placed in the position of the actual recipient, the tax act appears, from a perspective of reasonableness, as a product of pure arbitrariness on the part of the Administration, because the reasons of fact and/or law on which it is based are not discernible, the act will suffer from a lack of substantiation.

Article 77/1 of the LGT thus provides: "The decision of the procedure is always substantiated by means of a brief statement of the reasons of fact and law that motivated it, and the substantiation may consist of a mere statement of agreement with the grounds of previous opinions, information or proposals, including those that form part of the tax inspection report."

Descending to the specific case, it appears that the assessment acts in question occurred following an inspection act and in accordance with the homologated tax inspection report, a report which contains the grounds for the assessments in question.

Moreover, the Claimant itself ultimately concedes this – at least implicitly – by stating that "Since the assessment act in question does not contain any direct substantiation nor by reference, it cannot be 'presumed' that the substantiation is that which appears in a tax inspection report", having as its underlying understanding that the reference to a previous procedural document must be express.

However, this understanding is, from the outset, contradicted by the Decision of the Supreme Administrative Court of 19-05-2004, rendered in case 0228/03, where it is stated that "Substantiation presented after the issuance of the act does not count as substantiation, nor does substantiation contained in previous investigative documents to which no express or implicit reference has been made." Thus admitting that the reference may be implicit, that is, arising from the context of the act itself, or from which it emerges.

Similarly, the decision of the Administrative Court of Southern Region of 06-07-2004, rendered in case 01317/03, points to the effect that, with regard to substantiation, the notification of the assessment act should be "duly articulated with the tax inspection report, duly brought to the knowledge [of the taxpayer]".

In the same sense, it was held in the Decision of the Administrative Court of Northern Region of 14-05-2015, rendered in case 01198/05.7BEBRG, that:

"the notification of the statement of the additional VAT assessment serves to bring to the knowledge of the taxpayer the decision of the Directorate-General of Taxes which, by virtue of a correction made to the taxable matter, assesses additional tax. But it does not serve to bring to its knowledge these corrections, which have already been decided by the competent entity within the tax inspection sub-procedure.

Now, if the decision of the Director-General of Taxes to assess certain tax does not contain the decision to make corrections to the taxable matter that preceded it, it also does not have to contain the respective substantiation. That substantiation must be contained, in accordance with Article 77 cited, in the decision of the (sub)procedure of tax inspection itself. That is what occurs in the specific situation, as can be seen from the factuality set out in points 3 to 8 of the decision on the factual matters.

Thus, the failure to incorporate the substantiation that supports these corrections in the decision of the Director-General of Taxes does not result in any violation of the duty of substantiation".

In the same sense, the case law of the Supreme Administrative Court is oriented, which considers that "Notwithstanding the failure to expressly indicate the legal provision applicable, the required substantiation of law of the tax act will be sufficient with reference to the pertinent legal principles, to the applicable legal regime or to a determined normative framework, provided that, in any case, it can be concluded that these were known or knowable to a reasonable recipient placed in the specific position of the actual recipient." and that "The legal and constitutional requirement of substantiation of the tax act, arising from Articles 268 of the CRP, 77 of the LGT and 125 of the CPA, has, primarily, the purpose of allowing those interested to know the reasons that led the Administration to act, so as to enable them to make an informed choice between accepting the legality of the act and challenging it contentiously."

Thus, it is understood that, considering the specific context in which the assessment acts in question in these proceedings were issued, it would be perceptible, to a reasonable recipient placed in the position of the actual recipient, that the grounds for these are those contained in the inspection report that preceded them.

This, moreover, has been the determination of our superior courts in analogous cases, to which reference may be made to the Decisions of the Supreme Administrative Court of 10-09-2014, rendered in case 01226/13, of the Administrative Court of Northern Region of 13-09-2012, rendered in case 00334/05.8BEBRG, and of the Administrative Court of Southern Region of 23-05-2006, rendered in case 01156/06.

It should be noted, in this regard, that the Decision of the Supreme Administrative Court of 09-09-2015, rendered in case 01173/14, cited by the Claimant, does not correspond to the situation sub iudice, to the extent that in the case of that decision it was found that "the only inspection report of which there is knowledge relates to this latter company and, not to the appellant", a circumstance that was decisive for what was decided there.

As for the assessment of compensatory interest, the Supreme Administrative Court has understood that "The substantiation of an assessment of compensatory interest must make known, on the factual plane, the amount of the tax on which the interest is charged, the rate or rates applied and the period of its calculation.", elements which, as results from the factual matters, are contained in the notification made to the Claimant.

Understood in this way, it is easily concluded that, combined with the tax inspection report that preceded it, the assessment notified to the Claimant contains all the elements required by law, including its respective substantiation, and therefore, the alleged lack of assessment of withholding tax on income and lack of substantiation should be dismissed.

iv.

Finally, the Claimant alleges the failure to provide the right to be heard before the assessment of compensatory interest, pursuant to Article 60, paragraph 1, letter a) of the LGT.

To this end, the Respondent states that "the provision of paragraph 3 of Article 60 of the LGT, (...) requires the waiver of prior hearing in cases where the taxpayer has been heard before the conclusion of the tax inspection report, which indeed occurred".

Nevertheless, upon examination of the factual matters established, it is found that there is no element in the case file that allows demonstrating that the Claimant has been heard before the conclusion of the tax inspection report, specifically regarding the possibility of assessing compensatory interest, and it is undisputed that these are not an automatic consequence of the tax assessment.

Moreover, in the decision on the complaint for administrative reconsideration, where the Claimant raised this issue from the outset, the Tax Authority merely stated the understanding that the assessment of compensatory interest is associated with and dependent on the withholding tax assessment, and that the latter contains the respective essential elements.

Being, evidently, correct what is pointed out (and, as was seen previously, certain that the assessment in question contains the respective essential elements), it is equally evident that this has nothing to do with compliance with the prior hearing requirement.

Therefore, in principle, one should conclude that there was indeed a failure to provide the prior hearing requirement in the matter in question, and for the consequent procedural establishment of the claim on this point.

Nevertheless, Article 25/2 of the RJAT provides that:

"The arbitral decision on the merit of the claim submitted that ends the arbitral proceedings is still subject to appeal to the Supreme Administrative Court when it is in opposition, on the same fundamental question of law, with a decision rendered by the Administrative Court of Appeals or the Supreme Administrative Court."

Therefore, and also taking into account the duty of uniform application of Law (cf. Article 8/3 of the Civil Code), arbitral tribunals should decide in accordance with what is the settled case law of the superior courts of the administrative and fiscal jurisdiction.

On the matter in question, it has been understood that "Compensatory interest functions as a penalty clause for the delay in the assessment of tax, attributable to the taxpayer, being incorporated into the assessment of such tax, where it derives part of its substantiation, and also requiring a segment of its own substantiation, but regarding its assessment, the law does not require that the Tax Authority proceed with the prior hearing of the taxpayer in an autonomous and distinct manner from the hearing regarding the tax from which it derives." and that "Having heard the Tax Authority, the taxpayer, regarding the tax from which the assessment of compensatory interest derives, it is no longer legally required to proceed with a new hearing in an autonomous and distinct manner".

In the same decision, it can be read, among other things, that:

"- Referring again to the requirements of the assessment of compensatory interest, as an autonomous assessment, albeit incorporated into the tax assessment, it is evident that it must possess a minimum of its own substantiation regarding, first of all, the calculation base, the applicable rate, the time period to which it relates, but also and equally regarding the fault necessary for its imputability to the taxpayer; And it will be by reference to this same substantiation that the Tax Authority's power/duty to grant the taxpayer the right to prior hearing must be assessed.

  • Now, with regard to the rate, calculation base and time period to which compensatory interest relates, no margin for discretion is granted to the Tax Authority, which only has and can specify what is expressly provided for in the law, that is, with regard to these requirements, the action of the Tax Authority consists of a strictly bound procedure, and therefore its action in this domain is not susceptible to being influenced by any arguments that the appellant could raise, in order to influence the assessment act, by claiming the application of a different rate, or a different time period or calculation base, since these can only be those determined by the applicable legal order.

  • It is evident that the assessing entity, by error or for another reason, may, with regard to such requirements, take into account elements other than those to which it should attend; But such eventual circumstance does not constitute grounds for the exercise of the right to prior hearing, and only the express and clear reference to it will have to be part of the substantiation of the assessment so that its recipient can, against it react, by defect of violation of law.

  • Consequently and with regard to these grounds, what is understood is that the taxpayer has no right to prior hearing before the assessment of compensatory interest, which is to say that, in this domain, the failure to grant the exercise of the same does not constitute, even, any procedural irregularity and, much less, with effects rendering the final assessment act invalid.

  • Regarding the fault, as a requirement of the interest in question, if it is understood that, being a subjective judgment, it is implicit that the taxpayer, in the exercise of hearing, may bring to the procedure elements not previously available to the Tax Authority, which may displace it, in light of the elements relevant to its assessment, in the terms referred to above; For this reason, it cannot be concluded that the mere fact of the taxpayer's knowledge of the delay in the tax, of the applicable rate and of the time period, necessarily implies the act of its respective assessment, and therefore, in this scope, it is understood, on the one hand, as an essential formality to be observed, the notification of the recipient of the final tax act, to exercise, if desired, the right to hearing, and, on the other, that the failure to provide such power/duty is incapable of being degraded to a non-essential formality.

  • But what has just been said does not mean/imply that the reason lies with the appellant.

  • That is because, as noted above, fault is a concept of law to be extrapolated from adequate and pertinent factuality, and the displacement of the same passes through the demonstration of the lack of adherence to reality of that on which the assessing entity bases that conclusive judgment, by its inadequacy to that effect, not least by the relevant justification capable of excluding it.

  • Now, in the case of compensatory interest and following what was referred to above, the factuality on which the judgment of fault must be based can only be that which underlies the determination of tax deemed deficient, to the extent that they are incorporated into this, pursuant to paragraph 8 of Article 35 of the LGT.

  • But, if on the one hand it is inexorable that the taxpayer must be granted the exercise of the right to hearing, before the assessment of compensatory interest, under penalty of invalidity of this final act, it is equally axiomatic that the exercise of this right is satisfied, regarding the fault, by granting it the exercise of this same right before the assessment of the tax to which the compensatory interest relates, since it will be there that it will have to contest the adherence to reality, or justification, of the circumstances of fact that may constitute the grounds for such a judgment of censure.

  • Now, "in casu", it is established that the appellant was granted the right to hearing, with the notification it received of the draft inspection procedure report and from which, as is noted in the decision under appeal, all the circumstances of fact that led the Tax Authority to tax it using indirect methodology, as well as the calculation criteria for the 'quantum', are evident, which is to say, in line with what was stated above, that no other notification had to be made to grant it the exercise of prior hearing, by reference, specifically, to the assessment of compensatory interest, either because such formality must be considered observed with the notification made for that same purpose regarding the tax, or because, as to the remaining requirements for the assessment of compensatory interest, they consist of strictly bound conduct on the part of the Tax Authority."

This understanding was endorsed by the Supreme Administrative Court, which already held that:

"being the taxpayer heard in any phase of the procedure – in the case the respondent was notified to comment on the conclusions arising from the inspection action, as per the facts of paragraphs B) to F) of the evidence – should only be heard again before the assessment in the event of invocation of new facts on which it had not previously commented.

The appealed judgment does not refer to new facts having been invoked.

However, the respondent, in the conclusions of its counter-submissions, came to say that in the assessment, 'new elements' were considered, since the assessment contains compensatory interest and the draft of corrections did not previously contain any mention of this same compensatory interest.

The truth, however, is that the assessment of compensatory interest cannot be considered a 'new fact' for purposes of the right to hearing, not least because such interest varies depending on the time period to be considered.

By 'new fact' should be understood that which may determine the alteration of the tax, corrections, etc. The assessment of the interest amounts to only a mere arithmetic operation and therefore by itself does not justify the right to hearing.

In this way, even if at the time of the invitation to exercise the right to hearing the compensatory interest was not assessed, the Tax Administration was not required to hear the respondent again solely because the interest had been assessed."

Therefore, it must be considered that through the notification of the Claimant for the exercise of the right to hearing on the inspection report relating to the tax on which the interest came to be assessed, it sufficiently fulfilled its duty of prior hearing regarding the latter, and therefore, the arbitral claim should also be dismissed on this point.

Finally, the Claimant refers to the fact that "We may be facing a duplication of collection, since in recent years the company A..., Lda., before the cessation of its activity and closure of its liquidation, made several withholdings of income tax, extracting the payment guides and making the corresponding payments"

The duplication of collection presupposes, as is settled, that "once a tax has been paid in full, another of equal nature is required of the same or different person, relating to the same tax fact and the same time period" (Article 205/1 of the CPPT).

In the case, it is not demonstrated that tax of equal nature, relating to the same tax fact and the same time period, of another tax already paid, is being demanded from the Claimant.

Therefore, the arbitral claim should also be dismissed on this point.

C. DECISION

In these terms, this Arbitral Tribunal decides to judge the arbitral claim filed wholly without merit and, consequently:

  • To absolve the Respondent of the claim;

  • To maintain in the legal order the tax acts which are the object of the present arbitral action; and

  • To condemn the Claimant to pay the costs of the proceedings, in the amount fixed below.

D. Value of the Proceedings

The value of the proceedings is fixed at €111,219.25, pursuant to Article 97-A, paragraph 1, a), of the Code of Tax Procedure and Process, applicable by virtue of letters a) and b) of paragraph 1 of Article 29 of the RJAT and paragraph 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The amount of the arbitration fee is fixed at €3,060.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Claimant, since the claim was wholly without merit, pursuant to Articles 12, paragraph 2, and 22, paragraph 4, both of the RJAT, and Article 4, paragraph 4, of the cited Regulation.

Notify the parties.

Lisbon, 12 September 2018

The Presiding Arbitrator

(José Pedro Carvalho)

Arbitrator Member

(Ana Teixeira de Sousa)

Arbitrator Member

(Álvaro Caneira)

Frequently Asked Questions

Automatically Created

What are the legal requirements for valid tax notification of IRS withholding tax assessments under Portuguese law?
Under Portuguese law, valid notification of IRS withholding tax assessments must comply with Articles 36 and 39 of the CPPT (Tax Procedure Code). The notification must include: identification of the assessing authority; clear identification of the tax debt and assessment; legal grounds (fundamentação) explaining the factual and legal basis under Article 77 LGT; information on available remedies and deadlines; and proper delivery method. For electronic notifications, specific requirements under Article 39(12) CPPT apply. Defective notification can lead to nullity under Article 36(2) CPPT and may trigger statute of limitations (caducidade) issues under Article 45 LGT, as the time limits only begin with valid notification.
Can a taxpayer challenge IRS withholding tax assessments based on lack of proper legal grounds (fundamentação) under Article 77 of the LGT?
Yes, taxpayers can challenge IRS withholding tax assessments based on insufficient fundamentação under Article 77 of the LGT (General Tax Law), Article 268 of the Portuguese Constitution (CRP), and Article 153 of the CPA (Administrative Procedure Code). The Tax Authority must provide adequate reasoning explaining: the factual basis for the assessment; the applicable legal provisions; how the facts support the legal conclusion; and the calculation methodology. This substantiation requirement is a constitutional guarantee ensuring transparency and enabling effective defense. Assessments lacking proper fundamentação may be annulled as they violate taxpayers' fundamental rights. The level of detail required varies with case complexity, but must always enable the taxpayer to understand and contest the decision.
What happens when the right to prior hearing (audiência prévia) is not granted before compensatory interest is assessed in IRS proceedings?
When the right to prior hearing (audiência prévia) is not granted before compensatory interest is assessed in IRS proceedings, this constitutes a violation of Article 60(1)(a) of the LGT. Compensatory interest, while not technically a sanction, represents an additional financial burden that materially affects the taxpayer's position. Portuguese administrative law, grounded in Article 267 CRP, requires prior hearing before decisions adversely affecting rights or interests. Failure to provide this procedural guarantee may render the compensatory interest assessment annullable. However, courts distinguish between the principal tax assessment (where prior hearing occurs during inspection via draft report response) and subsequent interest calculations. The specific circumstances determine whether separate prior hearing is required for compensatory interest or if participation in the main assessment procedure suffices.
How does the statute of limitations (caducidade) apply to IRS withholding tax assessments under Article 45 of the LGT?
Under Article 45 of the LGT, the statute of limitations (caducidade) for IRS withholding tax assessments is generally four years from the date the tax became due. For withholding taxes, this typically runs from the deadline for submitting the withholding declaration. The limitation period is suspended during inspection procedures (Article 46 LGT) and only begins running after valid notification of the taxpayer under Article 36 CPPT. If notification is null or defective, the limitation period may not commence, potentially resulting in assessment expiry. Once the limitation period expires, the Tax Authority loses the right to assess (direito de liquidar), and any subsequent assessment is illegal and must be annulled. Taxpayers can invoke caducidade at any stage, including in arbitration proceedings under the RJAT, as it concerns a matter of public policy that tribunals must consider ex officio.
What constitutes duplicate tax assessment (duplicação de coleta) in Portuguese IRS withholding tax cases?
Duplicate tax assessment (duplicação de coleta) in Portuguese IRS withholding tax cases occurs when the same taxable income or obligation is assessed and collected twice, violating the principle that the same tax cannot be charged multiple times on identical facts. This may happen when: withholding tax is assessed against the paying entity and the same income is also taxed in the recipient's personal assessment without credit; the same withholding obligation is assessed in multiple periods due to administrative error; or corrections are made without canceling prior assessments. Duplicate assessment violates constitutional principles of tax legality and proportionality (Articles 103 and 266 CRP) and the principle of single taxation. When proven, duplicate assessments must be annulled or corrected, with refund of excess amounts paid plus compensatory interest. Taxpayers must demonstrate that identical factual and legal circumstances generated multiple tax charges to establish duplicação de coleta successfully.