Process: 107/2016-T

Date: October 12, 2016

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD arbitration case 107/2016-T addresses the critical issue of coefficient application under Article 31 of the Portuguese Personal Income Tax Code (CIRS) for taxpayers under the simplified tax regime. The dispute centers on whether electrical installation services should be taxed using the 0.75 coefficient (applicable to professional activities listed in Article 151 of CIRS) or the 0.10 coefficient (for remaining Category B income). Taxpayer A, operating an electrical installation business under CAE code for electricians, argued that their services fall outside Article 151's scope and should therefore attract the lower 0.10 coefficient. The Tax Authority (AT) contended that because the taxpayer declared income in field 440 of Annex B (designated for Article 151 professional activities), the 0.75 coefficient necessarily applied. This case highlights the tension between formal declaration procedures and substantive tax characterization. The taxpayers invoked AT Circular 5/2014, arguing that commercial and industrial activities providing services through installations should be classified under the 0.10 coefficient regime. AT countered that proper application of the 0.10 coefficient required declaration in field 443 ('Category B Income not included in previous fields'). The case raises fundamental questions about whether formal declaration errors can be corrected when they result in excess taxation, invoking constitutional principles of tax justice, equality, and legality under Article 266(2) of the Portuguese Constitution and Article 55 of the General Tax Law (LGT). The proceeding also demonstrates CAAD's role in resolving disputes over simplified regime coefficient application, with significant financial implications - the assessment disputed totaled €23,869.33 plus compensatory interest.

Full Decision

ARBITRAL DECISION

The Arbitrator Raquel Franco, appointed by the Deontological Council of the Administrative Arbitration Center (CAAD) to constitute the singular arbitral tribunal established on 06 May 2016, decides as follows:

I. REPORT

a) Procedural Course

On 24.02.2016, the taxpayers A… and B…, respectively, with Tax Identification Numbers … and …, filed a petition for constitution of a singular arbitral tribunal, under the terms and for the purposes provided in articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime for Tax Arbitration, hereinafter "RJAT"), with the Tax and Customs Authority (AT) being made a defendant.

The petition for constitution of the Arbitral Tribunal was accepted by the Esteemed President of CAAD and automatically notified to AT on 07.03.2016.

The remaining legal formalities followed, with the tribunal being constituted, under the terms provided in subsection c) of paragraph 1 of article 11 of Decree-Law No. 10/2011, of 20 January, as amended by Law No. 66-B/2012, of 31 December, on the day 08.06.2015.

On 06.07.2016 the meeting provided for in article 18 of RJAT was held. The Tribunal began by requesting clarifications from the Parties regarding the facts relevant to the proceedings, and subsequently notified the Parties to submit written statements and informed them of the deadline within which the arbitral decision would be rendered.

b) Subject Matter of the Petition for Arbitral Pronouncement

The Petitioners request the Tribunal to declare the illegality of the decision denying the administrative complaint they filed regarding the 2014 Personal Income Tax (IRS) assessment, as well as the latter, in the amount of € 23,869.33, with all further legal consequences, namely the payment of compensatory interest under article 43 of the General Tax Code (LGT), all on the grounds of breach of law due to error in the legal and factual assumptions, manifested in the non-application of the coefficient of 0.10 referred to in subsection e) of paragraph 2 of article 31 of the Personal Income Tax Code (IRS Code) (in the version in force at the date of the events) to the income of Petitioner A….

The Petitioners support their petition, in summary, in the following terms:

• Petitioner A…, by engaging in the commercial activity of "Electrical Installation," classified under CAE…, does not derive income, in an individual capacity, from professional activities listed in the table referred to in article 151 of the IRS Code, conducting the sale of various goods often incorporated into the services provided.

• According to the general rule of paragraph 2 of article 31 of the IRS Code (in the version given by Law No. 83-C/2013, of 31 December, entering into force on 1 January 2014), with respect to service provisions, taxable income is that resulting from the application of the coefficient of 0.75, when it derives from the professional activities listed in the table referred to in article 151 of the IRS Code, and 0.10 for the remaining income from category B (subsections b) and e) of paragraph 2 of article 31 of the IRS Code).

• To the service provisions of Petitioner A…, as they do not derive from activities listed in the table of article 151 of the IRS Code, the coefficient to be applied should be 0.10 under subsection e) of paragraph 2 of article 31 of the IRS Code.

• This is confirmed by Circular No. 5/2014 of the Office of the Director General of AT, specifically at point 4 thereof, insofar as it provides that the services provided by Petitioner A… fall outside the scope of the coefficient of 0.75, "(…) since commercial and industrial activities listed in article 4 that operate through service provisions, of which examples are transport services, hotel services and similar, food and beverage services and services provided by travel agencies, are classifiable under subsection a) of paragraph 1 of this article 3 and not under subsection b) of paragraph 1 of the same article."

• The Respondent, in its reply, states "(…) in order for the coefficient of 0.10, invoked in the PI, to be applied, the income would, in this case, have to be entered in field 443 intended for 'Category B Income not included in the previous fields.'"

• The Petitioner counters that, even if one were to admit that there may have been a material error in the completion of the fields of Annex B of the IRS declaration for the year 2014, Petitioner A… can never, even presuming their declaration presented in accordance with law to be true and in good faith (cf. article 75 of the LGT), be confronted with an assessment that does not reflect the reality and characteristics present in the person of the taxpayer.

• The principles of justice, equality and legality, which the tax administration must observe in the entirety of its activity (cf. article 266, paragraph 2, of the Constitution (CRP) and article 55 of the LGT), require that all errors in assessments that have resulted in the collection of tax in an amount greater than what would be due under law be officially corrected.

c) In response, AT alleges, in summary, the following:

• The petitioners sent, on 30/05/2015, their income declaration, form 3, for the year 2014, in accordance with what is provided in article 57, within the deadline provided in article 60, both of the IRS Code, to which they attached Annexes A, B and SS.

• With respect to the activity developed by the petitioners, they entered (in fields 401 and 440 of table 4-A of Annex B) as PRIMARY ACTIVITY – Electrician and as Secondary Activities "Repair of Televisions and Other Similar Consumer Goods," "Wholesale and Retail of Cosmetics and Hygiene Products, Specialty Stores" and "Engineering and Related Technical Activities."

• In fact, also in the PI, specifically in point 6, the petitioners state that "the now Petitioner husband declared his commencement of activity on 18/12/1993, (…), having been included in CAE code No.…, as Electrician."

• The petitioners declared, in the income declaration for the year in question, respectively, in "Sales of goods and products" the amount of € 30,828.88 and in "Income from professional activities provided for in the table of article 151 of the IRS Code and/or CAE" the amount of € 92,960.30.

• As a consequence of the values stated in the aforementioned income declarations sent, AT made assessment No. 2015… in the amount of € 21,620.81, whose payment deadline was 31/08/2015.

• The petitioners did not make payment of the assessment in question within the voluntary payment period, which is why the corresponding enforcement proceedings were initiated.

• They now come to express their disagreement with the amount assessed, arguing that the income subject to aggregation does not correspond to the tax reality, since, as they allege, the taxation with respect to the income of taxpayer A…, more specifically, regarding the incidence on the value of service provisions, was carried out through the application of the coefficient of 0.75, when, in their view, the commercial activity carried out points to the application of the coefficient of 0.10.

• AT contends that the values entered in field 440 of table 4-a of Annex B (as the petitioners did) are necessarily covered by the coefficient of 0.75.

• Effectively, in order for the coefficient of 0.10, invoked by the Petitioner, to be applied, the income would have to be entered in field 443, intended for "Category B Income not included in the previous fields."

• That is, in the manner in which the income declaration of the petitioners was presented, AT was obliged to tax them at the rate of 0.75. And furthermore: the activities carried out by the petitioner do not fall within subsection a) of paragraph 1 of article 31 of the IRS Code, but rather within subsection b) of that provision, such that the corresponding income was correctly taxed in accordance with the coefficient of 0.75.

II. CLARIFICATION OF ISSUES

1. The Tribunal is competent and is regularly constituted, under the terms of articles 2, paragraph 1, subsection a), 5 and 6, all of RJAT.

2. The parties have legal personality and capacity, are legitimate and are legally represented, under the terms of articles 4 and 10 of RJAT and article 1 of Ordinance No. 112-A/2011, of 22 March.

3. The proceedings do not suffer from defects that would invalidate them.

III. FACTS

III.1. Proven Facts

Before proceeding to the consideration of the issues, it is necessary to present the factual matter relevant to their understanding and decision, which, having examined the documentary evidence and the administrative procedure (PA) attached to the case file and also taking into account the facts alleged, is established as follows:

• Petitioner A… declared the commencement of his activity on 18.12.1993 under CAE code No.…, as Electrician.

• CAE code No.… currently corresponds to CAE No.…, referring to the activity of Electrical Installation.

• Between 1993 and 2014 Petitioner A… completed Annex B of the IRS declaration form 3 regarding "Category B Income," choosing to complete field 1 relating to the "Simplified Taxation Regime."

• In table 3 A of the said Annex – "Identification of the Taxpayer(s)," field 11 – "CAE Code (Professional, Commercial and Industrial Income," Petitioner A… always entered the code… "Electrical Installation."

• Field 10 – "Activity Table Code Art. 151 of the IRS Code" was never completed.

• In the year 2011, Petitioner A… declared sales of goods and products in the amount of € 29,940.52 (in table 4 A of field 401 of Annex B) and income from professional activities provided for in the Table of art. 151 of the IRS Code and/or CAE in the amount of € 4,714.48 (table 4 A of field 440).

• In the year 2012, Petitioner A… declared sales of goods and products in the amount of € 18,742.26 (table 4 A of field 401 of Annex B) and income from professional activities provided for in the Table of art. 151 of the IRS Code and/or CAE in the amount of € 2,411.50 (table 4 A field 440).

• In the year 2013, Petitioner A… declared sales of goods and products in the amount of € 26,693.97 (table 4 A of field 401 of Annex B) and income from professional activities provided for in the Table of art. 151 of the IRS Code and/or CAE in the amount of € 10,912.00 (table 4 A of field 440).

• In the year 2014, Petitioner A… declared sales of goods and products in the amount of € 30,828.80 (table 4 A of field 401), income from professional activities provided for in the Table of art. 151 of the IRS Code and/or CAE in the amount of € 92,960.30 (table 4 A of field 440) and operating subsidies in the amount of € 15,453.71 (table 4 A of field 424).

• On the basis of the taxpayer's declarations, AT made assessment No. 2015…, in the amount of € 21,620.81, whose payment deadline was 31/08/2015.

• The petitioners did not make payment of the assessment in question within the voluntary payment period.

• The petitioners later made payment of the amount assessed on the day 06.10.2015.

III.2. Unproven Facts

No facts relevant to the decision of the case were identified that were not proven.

IV. THEMA DECIDENDUM

The substantive issue in the present proceedings consists of determining which of the coefficients provided for in paragraph 2 of article 31 of the IRS Code in force in the fiscal year 2014 should be applied to the income obtained by the Petitioner from the provision of services in the activity with CAE "electrical installation."

V. LEGAL REASONING

The IRS declaration form 3 for the fiscal year 2014 was completed and filed by the Petitioners, who, among others, completed Annex B. In that Annex B, they declared income of various types, namely, from "sales of goods and products," in the amount of € 30,828.80, but also "income from professional activities provided for in the Activity Table of article 151 of the IRS Code and/or CAE," in the amount of € 92,960.30 and "other subsidies and other income," in the amount of € 15,505.55.

A coefficient of 0.75 was applied to the service provisions, resulting in the determination of taxable income in the amount of € 69,720.23.

In the year 2014, the wording of article 31 of the IRS Code was as follows[1]:

"1 – The determination of taxable income results from the application of objective indicators of a technical-scientific basis for the different sectors of economic activity.

2 – Until the approval of the indicators mentioned in the previous number, or in their absence, taxable income is obtained by adding to the income from service provisions made by the partner to a company covered by the fiscal transparency regime, under the terms of subsection b) of paragraph 1 of article 6 of the Corporate Income Tax Code, the amount resulting from the application of the following coefficients:

a) 0.15 on sales of goods and products, as well as service provisions made in the context of hotel activities and similar, food and beverage services:

b) 0.75 of the income from professional activities listed in the table referred to in article 151;

c) 0.95 of income from contracts having as their object the assignment or temporary use of intellectual or industrial property rights or the provision of information concerning experience acquired in the industrial, commercial or scientific sector, income from capital attributable to income-generating business and professional activities, the positive result of real property income, the positive balance of gains and losses and other capital increases;

d) 0.30 of subsidies or allowances not intended for operations;

e) 0.10 of subsidies intended for operations and remaining category B income not provided for in the previous subsections."

The declaration of amounts in field 440 of table 4-A of Annex B automatically determined the application to them of the coefficient of 0.75 for purposes of determining taxable income. As for the coefficient of 0.10, it could only be applied if the taxpayers had declared income in field 443 – "category B income not included in the previous fields" – a situation corresponding to subsection e) of paragraph 2 of article 31 then in force.

The Petitioners, however, come to allege a material error in the completion of the field of Annex B in question, requesting the Tribunal that, notwithstanding such error, the assessment in question be annulled with respect to the taxable income obtained by application of the coefficient of 0.75 to the declared value of the service provisions carried out in the year in question.

They allege, in summary, that, in previous years, service provisions from professional activities provided for in the Table of art. 151 of the IRS Code and/or CAE were taxed in the same manner (applying a coefficient of 0.70 or 0.75, as appropriate for the years in question), but that, in 2014, the wording of article 31, paragraph 2, subsection b) provided for a coefficient specifically applicable to income obtained from professional activities listed in the table referred to in article 151, which is not the case with the income erroneously declared in field 440 of table 4-A of Annex B by the taxpayers, which were obtained from the activity of "electrical installation" – which is not listed in the activity table of article 151 of the IRS Code – and not by the Petitioner as "Electrician," in an individual capacity or in the context of any other activity provided for in said table. Thus, notwithstanding the error they acknowledge having committed, they maintain that the assessment made still nonetheless suffers from an error in the assumptions that should be corrected.

It is, therefore, a matter of interpreting the provision set forth in the legal statement contained in subsection b) of paragraph 2 of article 31 of the IRS Code in force in the year 2014 in order thereby to determine whether the income from service provisions obtained in the year 2014 by the Petitioner fall, or do not fall, within its scope of application.

To the interpretation of tax provisions, the rules and general principles of interpretation of laws apply, in accordance with paragraph 1 of article 11 of the LGT, namely article 9 of the Civil Code (CC). In general terms of legal hermeneutics, the letter of the law is the minimum limit of the interpretive task (in the sense that it is from the legislative text that one must depart to determine the meaning of the provision), but also its maximum limit (in the sense that it is not possible to attribute to the provision a meaning that is not at least foreseen in its letter).

In the present case, starting from the literal element, the result of the interpretation appears to us unequivocal – the coefficient of 0.75 is applicable only to income from professional activities listed in the table referred to in article 151. It is therefore not possible to see how income from activities that are not "professional activities listed in the table referred to in article 151" can be included within such scope. Being the letter of the law the maximum limit of the interpretive task, it is not possible to conclude that other income besides these should receive the same treatment, especially when the legislator itself created, parallel to this specific category of income, a residual category provided for in subsection e) of the same paragraph 2 of article 31 of the IRS Code – which includes the "remaining category B income not provided for in the previous subsections."

Thus, the Petitioners are correct when they argue that the principles of justice, equality and legality, which the tax administration must observe in the entirety of its activity in accordance with the provision of article 266, paragraph 2, of the Constitution and article 55 of the LGT, require that all errors in assessments that have resulted in the collection of tax in an amount greater than what would be due under law be officially corrected, even when it is the taxpayer itself who discovers the error committed and brings it to the attention of AT.

However, the Petitioners are not correct when they petition for the payment of compensatory interest by AT by virtue of the overpayment of tax, since AT bore no responsibility for what occurred, as it was based on the declaration of the taxpayers which, under the terms of article 75 of the LGT, must be presumed to be true and in good faith. Indeed, under the terms of article 43 of the LGT – the legal provision governing the payment of compensatory interest – compensatory interest is due when it is determined, in administrative complaint or judicial challenge, that there was error attributable to the services from which results payment of the tax debt in an amount greater than that legally due. In the present case, we are faced with a case of "fault of the injured party," insofar as it was the declaration of the taxpayers that created the error and gave rise to the overtaxation.

VI. DECISION

In accordance with what is set forth above, it is decided:

(i) To uphold the petition for declaration of illegality of the 2014 Personal Income Tax assessment of the Petitioners, determining the annulment thereof and its replacement by another in which the income from service provisions obtained in the year 2014 is determined on the basis of the coefficient provided for in subsection e) and not in subsection b) of paragraph 2 of article 31 of the IRS Code then in force;

(ii) To dismiss the petition for payment of compensatory interest under article 43 of the LGT.

Value: in accordance with the provision of articles 97-A, paragraph 1, subsection a), of the Tax Procedure Code (CPPT) and article 3, paragraph 2 of the Costs Regulation in Tax Arbitration Proceedings, the value of the case is fixed at € 23,869.33.

Costs: under the terms of the provision of article 22, paragraph 4, of RJAT and Table I attached to the Costs Regulation in Tax Arbitration Proceedings, the amount of costs is fixed at € 1,224.00, to be paid by the Respondent in accordance with the provisions of articles 12, paragraph 2, and 22, paragraph 4, both of RJAT, and article 4, paragraph 4, of the aforementioned Regulation.

Let it be recorded and notified.

Lisbon, 12 October 2016

The Arbitrator,

Raquel Franco

[1] Wording given by Law No. 83-C/2013, of 31 December, entering into force on 01.01.2014.

Frequently Asked Questions

Automatically Created

What is the correct IRS coefficient under Article 31 of CIRS for service providers not listed in Article 151?
Under Article 31(2)(e) of CIRS, service providers whose activities are NOT listed in Article 151 should apply the 0.10 coefficient to determine taxable income under the simplified regime. This lower coefficient applies to remaining Category B income from services that fall outside the professional activities enumerated in Article 151. However, taxpayers must correctly declare this income in field 443 of Annex B to benefit from this coefficient, as opposed to field 440 which triggers the 0.75 coefficient for Article 151 activities.
How does the CAAD distinguish between the 0.75 and 0.10 coefficients in the simplified tax regime?
CAAD distinguishes between the coefficients based on the nature of professional activity and correct declaration procedures. The 0.75 coefficient applies to service income from professional activities specifically listed in Article 151 of CIRS (declared in field 440), while the 0.10 coefficient applies to other Category B income not derived from Article 151 activities (declared in field 443). The distinction requires analyzing both the substantive nature of the activity (whether it falls within Article 151's enumerated professions) and the formal declaration method used by the taxpayer.
Can electrical installation businesses apply the 0.10 coefficient under the IRS simplified regime?
Yes, electrical installation businesses can potentially apply the 0.10 coefficient if their services do not constitute professional activities listed in Article 151 of CIRS. AT Circular 5/2014 supports this interpretation, indicating that commercial and industrial activities operating through service provision fall outside the 0.75 coefficient scope. However, proper application requires declaring the income in field 443 of Annex B. The key determinant is whether the electrical installation activity constitutes a commercial/industrial service rather than a regulated professional activity under Article 151.
What is the procedure to challenge an IRS tax assessment through CAAD arbitration in Portugal?
To challenge an IRS assessment through CAAD arbitration, taxpayers must: (1) file a petition for constitution of a singular arbitral tribunal under articles 2 and 10 of Decree-Law 10/2011 (RJAT); (2) name the Tax Authority as defendant; (3) submit the petition within applicable deadlines after exhausting administrative complaint procedures; (4) await CAAD President's acceptance and automatic notification to AT; (5) participate in tribunal constitution; (6) attend the Article 18 RJAT meeting for clarifications; and (7) submit written statements as directed by the arbitral tribunal. The process requires paying arbitration fees and may involve enforcement proceedings suspension.
What are the legal consequences of misapplying simplified regime coefficients under Portuguese income tax law?
Misapplying simplified regime coefficients can result in: (1) excess tax assessments requiring payment of substantially higher amounts than legally due; (2) initiation of enforcement proceedings for unpaid assessments; (3) loss of compensatory interest under Article 43 LGT if taxpayer prevails; (4) need for costly administrative complaints and potential arbitration proceedings; (5) violations of constitutional principles of tax justice and equality under Article 266(2) CRP and Article 55 LGT requiring official correction; and (6) precedential implications for how similar activities are classified and taxed under the IRS simplified regime, affecting business planning and compliance strategies.