IRS Tax Assessment for De Facto Unions: CAAD Arbitration Decision 102/2017-T on Personal Income Tax Liquidation

ARBITRAL DECISION

I. REPORT

1. A… (hereinafter designated as "Claimant"), with tax identification number…, resident at Street…,…-…,…-… Lisbon, filed on February 3, 2017, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of January 20, i.e., the Legal Framework for Arbitration in Tax Matters ("RJAT"), a request for constitution of an Arbitral Tribunal, in order to challenge the express dismissal of the administrative complaint filed with identification No. …2016… – Complaint…/2016, against the assessment of Personal Income Tax ("IRS") No. 2016…, relating to the year 2014, in the amount of €1,361.67 (amount to be reimbursed), with the Tax and Customs Authority ("Respondent" or "TA") being named as defendant.

A) Constitution of the Sole Arbitral Tribunal

1. Pursuant to subparagraph (a) of paragraph 2 of Article 6 and subparagraph (b) of paragraph 1 of Article 11 of the RJAT, the Ethics Council of the Administrative Arbitration Center ("CAAD") appointed the undersigned as arbitrator of the Sole Arbitral Tribunal, who communicated acceptance within the applicable timeframe, and notified the parties of such appointment on April 3, 2017.

2. Thus, in accordance with the provisions of subparagraph (c) of paragraph 1 of Article 11 of the RJAT, and through communication from the President of the Ethics Council of the CAAD, the Sole Arbitral Tribunal was constituted on April 21, 2017.

B) Procedural History

1. In the request for arbitral decision, the Claimant petitioned for a declaration of illegality of the dismissal of the administrative complaint filed with respect to the IRS assessment act previously mentioned, relating to the taxation period of 2014.

2. The TA submitted a response, requesting dismissal of the request for arbitral decision, arguing that there was no violation of law, and requesting that the assessment act under analysis, as it violates no legal or constitutional provision, be upheld in the legal order.

3. By order of September 1, 2017, the Sole Arbitral Tribunal, pursuant to the provisions of subparagraph (c) of Article 16 of the RJAT, decided, without opposition from the parties, that it was not necessary to hold the hearing referred to in Article 18 of the RJAT.

4. Furthermore, within the scope of that order, the parties were also called upon to submit final arguments, with a successive period of 10 days. Neither the Claimant nor the TA submitted any final arguments within the stipulated timeframe.

5. The Arbitral Tribunal was duly constituted and is competent to assess the questions indicated (Article 2, paragraph 1, subparagraph (a) of the RJAT), the parties have legal personality and capacity and possess full standing (Articles 4 and 10, paragraph 2 of the RJAT and Article 1 of Regulation No. 112-A/2011, of March 22). No nullities occur, and therefore nothing impedes the judgment on the merits.

6. The present case is thus in conditions for the final decision to be delivered.

II. QUESTION TO BE DECIDED

1. The present Tribunal will first assess whether the Respondent is correct regarding the amendment of the value of the case, which should be fixed at €1,361.67 (and not €2,687.80 as initially requested by the Claimant).

2. In parallel, the present Tribunal will also decide on the merits of the case, which consists, in particular, of assessing whether, at the relevant date of the facts, it was necessary for de facto partners, in order to opt for the taxation regime of married taxpayers and those not judicially separated with respect to persons and property in a given fiscal year, to have identical tax domiciles previously registered in the Tax Management and Registration System, for at least two taxation periods, as argued by the Respondent, or, alternatively, whether it was sufficient that they could prove, if requested, such qualification, as argued by the Claimant.

3. That is, the present Tribunal will validate whether, in order to benefit from the aforementioned regime in 2014, the Claimant and respective de facto partner should have actually communicated to the Respondent, effective as of December 31, 2012, that their tax domiciles were identical, or whether, for that purpose, it was sufficient to demonstrate, with evidentiary elements, such qualification, if called upon to do so.

III. DECISION ON FACTUAL MATTERS AND ITS REASONING

1. Having examined the documentary evidence produced, the present Tribunal finds the following facts as proven, with relevance to the decision of the case:

I. On September 20, 2012, the Claimant and B…, in the capacity of tenants, celebrated a lease contract for a property intended for the residence of both, living, at least from that date, in de facto union (fact attested by the President of the Parish Board of …, parish in which they have resided since then, on June 26, 2015);

II. Notwithstanding the above, in the Tax Management and Registration System, only from July 7, 2014 onwards was there a common tax domicile;

III. The deduction from Personal Income Tax assessment associated with the tax benefit provided in paragraph 1 of Article 66-B of the Tax Incentives Statute ("EBF"), amounted, in the fiscal year 2014, to the limit provided, i.e., €250;

IV. Form 3 Income Tax Return of the Claimant and B… (de facto partner), relating to the fiscal year 2014, was filed within the deadline, on May 11, 2015.

1. The Tribunal's conviction regarding the facts found as proven resulted from the examination of the documents attached to the case file and contained in the request and response of the parties, as specified in the factual matters points set forth above.

IV. ON THE LAW

A) Legal Framework

1. Given that the legal question to be decided in the present case requires the interpretation of the relevant legal texts, it is important, first of all, to enumerate the rules that compose the relevant legal framework, at the date of occurrence of the facts (2014).

2. In the first place, it is necessary to cite the relevant articles of the De Facto Union Law, Law No. 7/2001, of May 11, subsequently amended by Law No. 23/2010, of August 30 (Law in force at the relevant date of the facts).

"Article 1

Object

This law adopts measures to protect de facto unions.

1. De facto union is the legal situation of two persons who, regardless of gender, live in conditions analogous to those of spouses for more than two years.

Article 2

(Exceptions)

They prevent the attribution of rights or benefits, in life or upon death, based on de facto union:

a) Age under 18 years at the date of recognition of the de facto union;

b) Manifest dementia, even with lucid intervals, and prohibition or incapacity due to mental anomaly, unless the dementia manifests or the anomaly occurs at a moment later than the beginning of the de facto union;

c) Undissolved marriage, except if separation of persons and property has been decreed;

d) Relationship in the direct line or in the 2nd degree of the collateral line or affinity in the direct line;

e) Prior conviction of one of the persons as author or accomplice for willful homicide, even if not consummated, against the spouse of the other.

Article 2-A

Proof of De Facto Union

1. In the absence of legal or regulatory provision requiring specific documentary proof, de facto union is proved by any legally admissible means.

(…).

Article 3

Effects

Persons living in de facto union under the conditions provided in this law have the right to:

(…)

d) Application of the personal income tax regime under the same conditions applicable to married taxpayers and those not separated with respect to persons and property;

(…)"."

1. Additionally, it should also be noted that Article 14 of the Personal Income Tax Code, as written on the relevant date of the facts, provided the following:

"Article 14

De Facto Unions

1. Persons living in de facto union who meet the requirements set forth in the respective law may opt for the taxation regime of married taxpayers and those not judicially separated with respect to persons and property.

2. The application of the regime referred to in the preceding paragraph depends on the identity of tax domiciles of the taxpayers during the period required by law to verify the requirements of de facto union and during the taxation period, as well as the signature, by both, of the respective income tax return.

3. In case of exercise of the option provided in paragraph 1, the provisions of paragraph 2 of Article 13 shall apply, both de facto partners being responsible for the fulfillment of tax obligations"."

4. The following is also listed Article 66-B of the EBF:

"Article 66-B

Deduction from Personal Income Tax of VAT Borne on Invoice

From the Personal Income Tax assessment due by taxpayers, an amount corresponding to 15% of the VAT borne by any member of the household, with a global limit of €250, which appears on invoices documenting service provision communicated to the Tax and Customs Authority (….) is deductible.

The incentive provided in the preceding paragraph operates through deduction from the Personal Income Tax assessment of the year in which the invoices were issued, provided that the household income tax return is filed within the periods provided in Article 60 of the Personal Income Tax Code"."

1. And, finally, Article 97-A of the Tax Procedure and Process Code ("CPPT").

"Article 97-A

Value of the Case

1. The admissible values, for purposes of costs or others provided by law, for actions that proceed in tax courts, are as follows:

a) When an assessment is challenged, the amount whose annulment is sought;

(…)"."

1. Thus, it is within this legal framework that it is important to assess whether the Personal Income Tax assessment issued by the Respondent, with reference to the taxation period of 2014, suffers from any illegality (as argued by the Claimant).

B) Arguments of the Parties

1. For the Claimant, "it is habitual residence that constitutes the concept of tax domicile. However, paragraphs 3 and 4 of the aforementioned Article 19 of the General Tax Law also provide that: 'the communication of the taxpayer's domicile to the tax administration is mandatory, under the terms of the law', and 'the change of domicile is ineffective until communicated to the tax administration'".

Thus, and in light of the above, the Claimant understands that the identity of tax domicile is verified when it has the same habitual residence, as long as it is proven, which he easily attests with the evidence already presented.

And even though the Claimant is aware of the consequences of the provisions in paragraphs 3 and 4 of Article 19 of the General Tax Law, he cannot fail to consider that the identity of tax domicile between him and B… cannot be questioned due to failure to comply with the communication provided in paragraph 3 of Article 19 of the General Tax Law (…) that is, the absence of that communication will only be relevant for purposes of proof of tax domicile, which will fall to the taxpayers, in view of the ineffectiveness of the change of domicile (…)".

1. For this purpose, the Claimant brings to light the understanding of the Central Administrative Court South, in the context of case No. 05655/12, of March 5, 2015, which held that "if the habitual residence of the taxpayer, natural person, is verified in a certain place, then that is his tax domicile, regardless of its communication to the TA. That is, the legal provision does not make the concept of tax domicile dependent on any communication, but only on 'habitual residence'".

(…)

The tax domicile of a given taxpayer, natural person, which is the place of his habitual residence, does not cease to be so because it was not communicated to the TA".

1. As regards the deduction from Personal Income Tax assessment provided in Article 66-B of the EBF, at the date of the facts, the Claimant understands that "the filing of the return was not untimely since (…) it was filed on May 11, 2015, fully complying with the deadline for filing the return set forth in Article 60 of the Personal Income Tax Code in force at the date of the facts".

2. Thus requesting that he be granted the value corresponding to that deduction, that is, €250.

3. In another light, the Claimant does not understand why the Tax and Customs Authority's assessment notice does not include the percentage granted as municipal tax benefit, which, in his case, would represent a deduction from the assessment in the amount of €161.12.

4. In light of the above, the Claimant requested the annulment of the express dismissal of the aforementioned administrative complaint, with all legal consequences, also requesting the payment of compensatory interest with respect to the amount that has not yet been paid to him and should have been.

5. For its part, the Respondent, after being duly notified, submitted its response in which it began by indicating that the value of the case had been incorrectly calculated, "it is verified that the Claimant seeks the annulment of the Personal Income Tax assessment No. 2016…, relating to the year 2014, in the amount of €1,361.67, which value should be the one indicated for the present case, and therefore the previously indicated value should be corrected".

6. As regards the central question of this case, the Respondent understands that "the essential requirement for taxpayers living in de facto union to benefit from the same tax regime as married taxpayers is the fact that they live in de facto union for more than two years, which is determined by the identity of tax domicile".

7. As such, for the Respondent "the communication of tax domicile is mandatory and only with this does the tax domicile declared by the taxpayer have effect before the TA.

In this way, only on 2014-07-04 was there identity of tax domicile between the Claimant and B… who appeared as taxpayer B in the return filed by the Claimant, and only after that date does the counting of two years begin for the Claimant to be able to benefit from the tax regime for de facto unions".

1. And, along those lines, the Respondent understood that the documentary evidence does not attest "in a clear, obvious, evident and credible manner, that the Claimant was living in de facto union with B… since 2012".

2. Finally, as regards the deductions from Personal Income Tax assessment, both with respect to VAT and municipal benefit, the Respondent considered that "when the official return was prepared, in accordance with the provisions of subparagraph (b) of paragraph 1 of Article 76 of the Personal Income Tax Code, the legal deadline for filing the income tax return was exceeded, and therefore the legal requirements are not met for the Claimant to benefit from the tax deduction from the assessment of VAT borne on invoice, as well as the municipal benefit".

3. In conclusion, the TA requests that the claim made be dismissed and, as a consequence, that it be absolved of the request, in the terms previously mentioned.

C) Assessment by the Arbitral Tribunal

1. As a preliminary matter, it falls to the Arbitral Tribunal to determine what is, ultimately, the value of the case.

2. It follows from Article 97-A of the Tax Procedure and Process Code that the value of the case, in particular for determination of costs, when an assessment is challenged, is the amount whose annulment is sought.

3. In light of the above, it seems clear to the present Tribunal to decide that in the present case, the value to be considered must be, naturally, the contested amount, €1,361.67, and not the value that the Claimant understands as due, that is, €2,687.80.

4. In this manner, it is understood that the value of the case should be corrected to €1,361.67, with the other legal consequences, in particular regarding the determination of applicable arbitral costs.

5. Next, the present Tribunal will be able to assess the merits of the case.

6. As a preliminary matter, it should be noted that it is considered that the question sub judice is only to determine whether, for purposes of application of Article 14 of the Personal Income Tax Code, at the relevant date of the facts, the Claimant and B… should already have been registered in the Tax Management and Registration System at the same tax domicile since 2012, or whether, perhaps, it was sufficient that they could provide proof of such identity of domicile.

7. For the present Tribunal this matter does not have particular complexity and, in order to explain its understanding, it brings to light the Judgment of the Central Administrative Court South, relating to case No. 05655/12, of March 5, 2015, timely presented by the Claimant.

8. In fact, applauding the aforementioned Judgment, its content is partially cited, "the obligation to communicate the taxpayer's domicile to the tax administration is only provided for (…) and (…) it is established that its change is ineffective until communicated to the tax administration.

Now, this is merely a question of the effectiveness of the change of domicile, its production of effects before the TA, which does not affect the substance, and does not even integrate, the legal concept of tax domicile provided in paragraph 1 of Article 19 of the General Tax Law".

1. The learned Judgment continues as follows, "for purposes of the provisions of paragraph 2 of Article 14 of the Personal Income Tax Code, the identity of tax domicile of taxpayers is verified when they have the same habitual residence [proved], regardless of compliance with the communication provided in paragraph 3 of Article 19 of the General Tax Law,

(…)

The absence of that communication will be relevant for purposes of proof of tax domicile, which will fall to the taxpayers, in view of the ineffectiveness of the change of domicile that results from the provisions of paragraph 4 of Article 19 of the General Tax Law (…)

Two persons living, regardless of gender, in conditions analogous to those of spouses for more than two years, in the same habitual residence [proof which falls to the taxpayers, in case of non-compliance with the obligation of communication provided in paragraph 3 of Article 19 of the General Tax Law] establishes the identity of tax domicile provided in paragraph 2 of Article 14 of the Personal Income Tax Code".

1. In light of the above, it becomes clear, ultimately, that registration in the Tax Management and Registration System is not a sine qua non condition to extend the joint taxation provided for married taxpayers to those in de facto union.

2. In fact, if such registration is not made due to non-compliance with the obligation of communication provided in paragraph 3 of Article 19 of the General Tax Law, it is up to the taxpayers to prove the identity of tax domicile, through means they deem appropriate.

3. Now, in the case sub judice, the Claimant attached not only the lease contract celebrated by him and B…, dated September 20, 2012, which allows verification that at the date of formation of the 2014 Personal Income Tax return, on the last day of that fiscal year, they had already been living in de facto union for more than two years, but also a certificate from the Parish Board of …, attesting that the two have been living in de facto union since that date.

4. In this manner, the correction made by the Respondent should not proceed, and the assessment notice presented should be amended to the value initially indicated by the Claimant when he submitted Form 3 Income Tax Return in a timely manner.

5. As a consequence of the aforementioned return having been submitted within the period provided by law, the deductions from the assessment requested by the Claimant, regarding VAT and municipal benefit, should also be granted.

6. Finally, compensatory interest is also due, calculated on the amount that still remains to be paid to the Claimant.

V. DECISION

1. In terms of which this Arbitral Tribunal decides:

A) To find the request for arbitral decision wholly meritorious and, as a consequence, to declare the Personal Income Tax assessment referred to above, as of reference year 2014, illegal;

B) To condemn the Respondent to reimburse the Claimant in the amount of Personal Income Tax owed, plus compensatory interest, as well as the costs of the proceedings.

VI. VALUE OF THE CASE

1. The value of the case is fixed at €1,361.67, in accordance with Article 97-A, paragraph 1, subparagraph (a), of the Tax Procedure and Process Code, applicable under subparagraphs (a) and (b) of paragraph 1 of Article 29 of the Legal Framework for Arbitration in Tax Matters and paragraph 2 of Article 3 of the Regulation on Costs in Tax Arbitration Proceedings ("RCPAT").

VII. COSTS

1. In accordance with the provisions of Article 22, paragraph 4, of the Legal Framework for Arbitration in Tax Matters, the arbitration fee is fixed at €306, in accordance with Table I of the aforementioned Regulation, to be borne by the Respondent, given the total merit of the request.

Notify the parties.

Lisbon, CAAD, October 2, 2017

The Arbitrator

(Dr. Sérgio Santos Pereira)