Simplified Tax Regime IRS: Coefficient for Sales vs Services in Official Tax Review (CAAD 107/2017-T)

ARBITRAL DECISION

REPORT

A…, with tax domicile at Rua …, No…, …-… Lisbon, holder of Citizen Card No …, valid until 25/08/2021, tax identification number …, hereinafter referred to as the "Claimant", hereby, pursuant to the provisions of subparagraph a) of Article 2, paragraph 1 and Article 10, both of Decree-Law No. 10/2011, of 20 January (hereinafter "RJAT"), requests the constitution of an arbitral tribunal and submits a request for arbitral award in which the Tax and Customs Authority (hereinafter "Respondent" or "AT") is the opposing party, which concerns an order dismissing the request for discretionary review of Personal Income Tax (hereinafter "IRS") assessments for the years 2011, 2012, 2013, issued by the Director of IRS Services, dated 30 September 2016, with a view to its annulment, on the grounds that it is affected by illegality and that, consequently, the said discretionary review of the said assessments be decreed, with the consequent refund of the amount of € 17,997.67.

The request for constitution of an arbitral tribunal, corresponding to registration No. 3941, was validated and accepted by His Excellency the President of CAAD on 10 February 2017, having been notified to the Tax and Customs Authority (hereinafter "AT" or "Respondent") on 17 February 2017.

The Claimant chose not to appoint an arbitrator, and the Deontological Council, in accordance with paragraph 1 of Article 6 and paragraph 1 of Article 11 of the RJAT, appointed the undersigned as arbitrator of the sole arbitrator tribunal, who accepted the appointment within the legally stipulated period.

The parties were duly notified of the arbitrator's appointment on 3 April 2017 and did not express any objection to it.

The sole arbitrator tribunal was thus constituted on 20 April 2017, in accordance with the provisions of subparagraph c) of Article 11, paragraph 1 of the RJAT.

The Respondent was notified on 24 April 2017 of the order issued by the arbitral tribunal in accordance with the provisions of Article 17, paragraph 1 of the RJAT, to submit a reply, request additional evidence production and remit the administrative file.

The distinguished representatives of the Respondent filed the AT's reply to the case on 30 May 2017, in which they argued for the complete dismissal of the request for arbitral award. They based their position on the following exceptions: i) failure by the Claimant to comply with the formality set out in Article 59 of the CPPT, ii) timeliness of the request for discretionary review, as there is no error attributable to the services, iii) failure to meet the requirements for consideration of the request for discretionary review, iv) venire contra factum proprium and v) material incompetence of the arbitral tribunal to consider part of the request. They disputed the claimed qualification of income earned by the Claimant under the simplified tax regime for category B IRS as sales, to which the coefficient of 0.2 would apply for the purposes of determining category B income, contrary to the coefficient applied (0.7 applied in 2011 and 2012 or 0.75 applied in 2013). They further disputed the Claimant's right to compensatory interest, to the extent that it had not been requested in the request for arbitral award and, even if it had been, there would be no right to compensatory interest given that the error is not attributable to the services but to the Claimant. Finally, they contested the Claimant's request for witness testimony production, to the extent that as it is a matter of law, such evidence would not be apt to support the facts alleged by the Claimant. Not being the understanding of the arbitral tribunal, the Claimant would be notified to indicate which facts from the initial petition would be subject to witness testimony production.

Following the Respondent's reply, the Claimant was given a period of 10 days to indicate the facts on which witness testimony would bear and the Respondent was requested to attach to the case a copy of the administrative file (order of the arbitral tribunal notified to the parties on 5 June 2017).

In compliance with the above order, the Respondent attached a copy of the administrative file to the case and the Claimant indicated the facts on which witness testimony should bear: 4 to 9.26, 12 (paragraphs 9.1 to 9.12) and for counterproof of Article 120 of the AT's Reply.

The arbitral tribunal set 3 July 2017, at 14:15, for the first hearing, in accordance with Article 18 of the RJAT. It further indicated that at the said hearing the witness's testimony would be heard, followed by oral submissions, if necessary. The Respondent was further requested to attach to the case legible copies of the administrative file and the parties were requested to send word versions of the procedural documents.

On 3 July 2017, at 14:15, the hearing provided for in Article 18 of the RJAT took place at the headquarters of CAAD, Avenida Duque de Loulé No. 72-A, Lisbon.

At the said hearing, witness evidence was produced, with the witness called by the Claimant, Dr. B…, giving testimony on the facts contained in the request for arbitral award, mentioned above.

The representatives of the Respondent and the Claimant's representative did not waive oral submissions, and the Arbitral Tribunal set a period of 10 consecutive days for the Claimant and Respondent, in this order, to submit their final written submissions. The arbitral tribunal set 15 September 2017 for the issuance of the arbitral decision, and the Claimant was warned that he should proceed to pay the subsequent arbitration fee in accordance with paragraph 3 of Article 4 of the Regulation of Costs in Arbitration Proceedings, and communicate its payment to CAAD.

The Claimant submitted written submissions on 13 July 2017, reiterating, in essence, the position held in the request for arbitral award.

The Respondent submitted written submissions on 12 September 2017, in which it maintained the position held in its reply.

PARTIES' SUBMISSIONS

A. Submission of the Claimant

The Claimant submits that the present request for arbitral award should be judged entirely meritorious based on erroneous qualification and quantification of his income, profits and patrimonial values for the years 2011, 2012 and 2013, in accordance with the provisions of subparagraph a) of Article 99 of the CPPT, because in the concrete case of income earned by the claimant under category B IRS, simplified regime, the qualification as sales should prevail and not as service provision.

Consequently, the Claimant petitions the annulment, as affected by illegality, of the order dismissing the request for discretionary review (of the assessments) of IRS for 2011, 2012 and 2013, dated 30 September 2016 and that, in consequence, the said discretionary review of the said assessments be decreed, with the Claimant being ordered to refund the amounts wrongly paid in the amounts of € 5,611.59 (2011), € 5,808.78 (2012) and € 6,577.30 (2013), in the total amount of € 17,997.67. In sum, the Claimant seeks the qualification of income earned under the simplified tax regime for category B IRS as sales, to which the coefficient of 0.2 would apply, contrary to the coefficient applied (0.7 applied in 2011 and 2012 or 0.75 applied in 2013).

In his written submissions, the Claimant maintained in essence the submission, requesting refund to the Claimant of the amount of € 17,997.67, in addition to the respective interest at the legal rate.

B. Submission of the Respondent

The Respondent contends that the Personal Income Tax assessments for 2011, 2012 and 2013 are lawful, arguing that the factual and legal reasons invoked by the Claimant are far from substantiating/supporting any of the submissions formulated by the Claimant, and the present request for arbitral award should be dismissed. For this purpose, the Respondent alleged reasons of a procedural nature, defending itself by way of exception and by way of challenge, which are summarized below:

The Claimant, by entering in his income declarations facts or values that did not correspond to reality, should have proceeded to their replacement, within the periods and limits set out in paragraph 3 of the aforementioned Article 59 of the CPPT. Not having done so, he failed to comply with the formality set out in the law, namely in Article 59 of the CPPT. By failing to comply with this formality, the declarations submitted by the Claimant became consolidated in the legal order. To that extent, they were not susceptible to being altered through the request for discretionary review, as the Claimant attempted, under penalty of fraud against the law.

Furthermore, the request for discretionary review is untimely, to the extent that the exceptional request set out in paragraph 4 of Article 78 of the General Tax Law (LGT) cannot be applied to the Claimant, given that it should have been submitted within three years following the tax act, on the grounds of serious or notorious injustice, provided that it was not attributable to negligent conduct on the part of the Claimant. Verifying the services the negligent conduct of the Claimant, the request for review is clearly untimely.

Furthermore, concluding that there is no error attributable to the services, but an error exclusively attributable to the Claimant himself, since he completed the IRS Model 3 declarations for the years 2011 to 2013 as having earned income from service provision and not from sales, so the error in the declaration is exclusively attributable to the Claimant and not to the Respondent. Thus, as there is no error attributable to the services, the legal procedural requirements on which the request for discretionary review depends, to be made within 4 years, in accordance with the provisions of Article 78, paragraph 1 of the LGT, are not met. Therefore, the request for discretionary review is untimely due to manifest violation of the periods set out in paragraphs 1 and 4 of Article 78 of the LGT.

The legal position of the Claimant – request for discretionary review and arbitral request – is in manifest contradiction with the conduct previously assumed by him expressed in the submission of the IRS declarations for 2011, 2012 and 2013 and constitutes an abuse, set out in Article 334 of the Civil Code, namely "venire contra factum proprium".

The Respondent alleges, finally, the material incompetence of the arbitral tribunal to consider part of the request. The Respondent believes that the arbitral tribunals operating in CAAD may consider second or third-degree acts that have as their object the consideration of the lawfulness of acts of those types, in particular acts that decide gracious claims and hierarchical appeals. As such, the consideration of requests for recognition of rights does not fall within the scope of these competencies, nor is the consideration of the matter relating to the implementation of decisions affecting the lawfulness of tax acts covered. This would result in the material incompetence of the Tribunal to consider the request identified above, which constitutes a dilatory exception that prevents the continuation of the proceedings, leading to the dismissal of the instance, in accordance with the provisions of Articles 576, paragraph 2, 577, subparagraph a) of the Code of Civil Procedure (CPC), applicable ex vi Article 29, paragraph 1, subparagraph e) of the RJAT.

This material incompetence would imply, in case the action proceeds, a correction of the case value to the amount of the IRS assessments in dispute.

It concludes that the Claimant's activity consists of typical service provision, in casu, the manufacture of prostheses, with application of materials, so all income earned by the Claimant under category B IRS constitutes, in its entirety, income from service provision, and to him would correspond, for the purposes of determining the taxable income applicable in the simplified tax regime, a coefficient of 0.70, in the years 2011 and 2012, and of 0.75 in 2013, respectively, and not a coefficient of 0.2, applicable to income resulting from sales conducted.

The Respondent considers that there is no right to compensatory interest attributable to the Claimant, to the extent that this was not requested in the competent request for arbitral award and, even if it had been, it would not be applicable in the case at hand, given that the error is not attributable to the services but to the Claimant.

The Respondent maintained, in essence, the submissions outlined above in its written submissions, adding the following additional considerations:

The witness evidence produced is irrelevant for the purpose of forming a legal conviction about the (past) facts in dispute, given that the witness heard had no direct knowledge of the facts at issue in the case, since he only knew the Claimant and his situation in 2015. Thus, he only had knowledge of facts that had been transmitted to him by the Claimant, a party to the case. If there was any knowledge, therefore, it would be indirect and interested knowledge.

Admitting, however, that the witness knows the current reality of the Claimant, having provided clarifications of interest to the question.

Concluding that the Claimant's activity consists of typical service provision, in casu, the manufacture of custom-made prostheses, under strict individualized specifications, with application of materials, so all income earned constitutes, in its entirety, income from service provision, to which the coefficient of 0.70 or 0.75 applies, in the years 2011 and 2012 or in 2013, respectively.

PRELIMINARY EXAMINATION

The arbitral tribunal is regularly constituted.

The Claimant cumulates requests relating to distinct tax periods (2011, 2012 and 2013), which, in accordance with Article 104 of the Code of Tax Procedure and Process and paragraph 1 of Article 3 of the RJAT, is admissible given the identity of factual circumstances and the application of the same principles and rules of law.

The parties have legal personality and capacity, are legitimate and are legally represented (Articles 3, 6 and 15 of the Code of Tax Procedure and Process, ex vi subparagraph a) of Article 29 of the RJAT).

Exceptions were raised by the Respondent – failure to comply with the formality set out in Article 59 of the CPPT by the Claimant, untimeliness of the request for discretionary review, failure to meet requirements for consideration of the request for discretionary review, venire contra factum proprium and material incompetence of the arbitral tribunal to consider part of the request – which will be analyzed in the operative part, after the establishment of the facts found to be proven.

FINDINGS OF FACT

Facts Found to be Proven

With relevance for the decision of the case, the following facts are found to be proven.

The Claimant is a Personal Income Tax taxpayer resident in Portugal.

The Claimant is an employee working part-time at the faculty …, where he is an assistant in the dental prosthetics laboratory department.

The Claimant has been classified, as of 1 January 2009, for IRS purposes, under the simplified regime for determination of business and professional income, provided for in subparagraph a) of Article 28, paragraph 1 and in Article 31 of the IRS Code.

As of 4 June 2012, he has been classified for IRS and VAT purposes in CAE 32502[1]:

The Claimant carries out the activity of manufacturing dental material, acquiring raw materials, namely polymers, monomers, screws, welds, plasters, etc., transforming and shaping them, at the request of dental clinics and dentists.

The Claimant exercises his professional activity as a dental prosthetics technician in a specialized laboratory, located at …, …, …, … .

In 2011, the raw materials used by the Claimant were provided free of charge by his client, C…, Lda., NIPC… . The Claimant manufactured dental prostheses, on demand, with those raw materials acquired free of charge, which were sold to C…, Lda..

Therefore, in 2011 there is no accounting for inventory and in the periodic quarterly VAT declarations it was not declared by the Claimant deductible VAT relating to purchase of raw materials. The Claimant only has invoices/receipts issued to his sole client C…, Lda..

In the periodic VAT declaration relating to the first quarter of 2012, deductible VAT relating to the purchase of raw materials was also not declared. The first acquisition of raw materials occurred on 18 May 2012, already in the 2nd quarter of 2011.

Invoice No. … of 31 July 2012, in the amount of €40, with the description BTP, issued to D…, concerns the placement of a prosthesis to a private patient. This is a service provision, practiced in 2012, which would have been exempt from VAT, but was wrongly considered as being subject to VAT at the reduced rate.

The inventories for 2012 and 2013 of the Claimant concern only raw materials. There are no finished products and stocks given that prostheses are made-to-order products. All prostheses are different because they are adapted morphologically to the patient.

The invoices have the designation of the products, with the references being the names of the products and the name of the patient.

There are several invoices issued in 2012 by the Claimant with incorrect Tax Identification Numbers, but which were not replaced at the request of clients.

The sequential numbering of invoices issued between 2011 and 31 March 2012 ends with invoice No. 2012…, dated 31 March 2012, issued to C…, Lda.

The following invoices have a different sequential numbering, initiated with invoice No. 12…, issued from 1 June 2012.

Invoices numbered 12… to 12… were cancelled by the Claimant.

During the years 2011, 2012 and 2013, in addition to dental prostheses sold to dentists or dental clinics, the Claimant issued invoices to companies that engage in activity similar to his, namely the manufacture of dental prostheses, in particular to C…, Lda., E…, Lda., F…, Lda..

The invoices issued by the Claimant with the mention "repair", in particular invoices numbered …142, …149, …150, …186, …200, …202, refer to new prostheses that were not perfect for the patient and had to be adjusted, so "repair" is an alteration made to the initial new product.

On 23 May 2012, the Claimant submitted the IRS declaration, Model 3, for the year 2011, in which he completed field 403 of table 4A (other service provision and other income), of Annex B, with the amount of €35,430.05, resulting in assessment No. 2012…, from which resulted tax to be refunded of € 345.93 (see pages 606 to 608 and 615 of the PA).

On 24 May 2013, the Claimant submitted the IRS declaration, Model 3, for the year 2012, in which he completed field 403 of table 4A (other service provision and other income), of Annex B, with the amount of € 39,248.75, resulting in assessment No. 2013…, from which resulted tax to be paid of € 2,257.08 (see pages 609 to 611 and 616 of the PA).

On 28 May 2014, the Claimant submitted the IRS declaration, Model 3, for the year 2013, in which he completed field 403 of table 4A (other service provision and other income), of Annex B, with the amount of € 35,278.55, resulting in assessment No. 2014…, from which resulted tax to be paid of € 7,368.18 (see pages 612 to 614 and 616 of the PA).

In 2015, the Claimant acquires a new certified accountant (CC), who detects an error or mistake in the Model 3 IRS declaration of 2014 regarding the classification of the Claimant's professional income as service provision, which should be, according to him, qualified as sales.

Consequently, on 16 September 2015, an IRS declaration, Model 3, for the year 2014, was submitted, which was subject to corrective assessment with the right to refund on 13 October 2015 (see page 653 of the PA).

On 16 November 2015, the Claimant submitted an IRS declaration, Model 3, for the year 2011, in which he completed field 401 of table 4A (sales of goods and products), of Annex B, with the amount of €35,430.05.

On the same date, he submitted an IRS declaration, Model 3, for the year 2012, in which he completed field 401 of table 4A (sales of goods and products), of Annex B, with the amount of € 39,248.75.

And, furthermore, the IRS declaration, Model 3, for the year 2013, in which he completed field 401 of table 4A (sales of goods and products), of Annex B, with the amount of € 35,278.55.

The substitute declarations, mentioned above, were accepted, given as certain, but remained in the situation of "non-assessable declaration" (see pages 606, 609 and 614 of the PA).

On 28 December 2015, the Claimant presented to the Lisbon tax service… a request for discretionary review, under Article 78 of the LGT, on the grounds of error/mistake in the classification of his professional income as service provision (field 403 of Annex B of the model 3 declaration), instead of its qualification as sales (field 401 of Annex B of the model 3 declaration) in the IRS declarations, Model 3, for 2011, 2012 and 2013, and the issuance of corrective assessments of the substitute IRS declarations, Model 3, submitted on 16 November 2015, for 2011, 2012 and 2013, with the consequent refunds.

Following the request for discretionary review of the IRS assessments for 2011, 2012 and 2013, the AT requested the Claimant to provide additional information, which he provided as described below:

Official Letter No. …, dated 2 March 2016 – requested the presentation of copies of invoices issued and representative of 15% of the values received in 2011, 2012 and 2013, respectively, which he stated to be €35,340.05 in 2011, €39,248.75 in 2012 and €35,287.55 in 2013; On 15 March 2016, the Claimant submitted a reply to this letter, attaching a detailed list of invoices issued and representative of 15% of the values received in each year (see pages 38 to 40 of the PA);

Official Letter No. … of 21 March 2016 would replace Official Letter No. …, requesting the AT to present copies of invoices issued representative of the values received in each of the years, which it stated to be €35,340.05 in 2011, €39,248.75 in 2012 and €35,287.55 in 2013; The Claimant would reply to this letter on 31 March 2016 (see page 74 et seq. PA), attaching copies of the invoices. On 1 April 2016, the Claimant requested the attachment of 7 additional invoices relating to 2012, which, by oversight, had not been delivered on 31 March 2016.

Official Letter No. … of 20 June 2016, the IRS Directorate notified the Claimant to submit a copy of all invoices for the purchase of goods sold in the years 2011 to 2014, as well as inventories of inventories for the same years. It was also requested to send a copy of all means of receipt by client C… Lda., NIPC … . In reply to Official Letter No. … of 20 June 2016 from the Respondent, the Claimant sent on 4 July 2016 the reply (see document 5 of the PPA and page 675 of the PA).

After these final clarifications were provided, the Claimant was notified of the draft decision (by Official Letter No. … dated 11 August 2016) dismissing the request for discretionary review (see pages 828 to 834 of the PA), due to negligent conduct on the part of the Claimant, and of the 15-day period to exercise the right to a hearing, in accordance with Article 60 of the LGT.

The above-identified letter was received by the Claimant on 12 August 2016, and he requested by registered letter with acknowledgment of receipt, dated 26 August and received on 31 August 2016, the scheduling of a date to be heard in a prior hearing.

However, although it considered that the request for prior hearing was out of time, the AT scheduled a meeting with the Claimant for 26 September 2016 for the purpose of a hearing.

On 26 September 2016, the Claimant appeared at the scheduled meeting, but submitted his right to a hearing in writing, which, despite being considered untimely by the Respondent, was taken into account and analyzed (see pages 851 et seq. of the PA).

On 30 September 2016, an order dismissing the request for discretionary review was issued, which became final.

Having been this order notified to the Claimant by registered letter under No. RD…PT, with acknowledgment of receipt, which appears to be signed on 14/11/2016.

On 9 February 2017, a request for arbitral award was filed with the Administrative Arbitration Center.

Facts Not Proven

There are no other facts with relevance for the decision that have not been found to be proven.

Basis for the Proven and Unproven Facts

The Tribunal's conviction regarding the facts found to be proven resulted from examination of all documents attached to the case, as well as from the appreciation of the content of the pleadings and of the administrative file.

Regarding the relevance of witness testimony for the formation of the Tribunal's conviction, to the extent that the witness had no direct knowledge of the facts, the following is transcribed from a recent ruling of the Central Administrative Court of the North[2] and reference is made to the content of a Ruling of the Court of Appeal of Guimarães[3], on the admissibility of indirect testimony, whose position we endorse:

"(…) V - The freedom in the formation of the judge's conviction should be based on evidentiary elements, on judicial presumptions, on rules of common experience and/or on logical criteria that, in a sustained and secure manner and taking into account the rules of allocation of the burden of proof, allow a reasoned conviction as to the verification of facts that are found to be proven.

VI - Indirect testimony is not confused with "hearsay" testimony, and the former, unlike the latter, has a specifically identified source, revealing, despite not having personal knowledge of the fact, the knowledge of the one who had it and who transmitted it to him.

VII - Not being indirect testimony prohibited, its valuation falls within the scope of the assessment of credibility (greater or lesser depending on the circumstances of each specific case) that it may merit to the judge. (…) ".

Given the above, in the case at hand, given that the witness heard gave testimony about facts occurring in the years 2012 to 2014, inclusive, and given that he only knew the Claimant in 2015, he could only have knowledge of the facts indirectly, whether through the Claimant or through third parties.

To that extent and in light of the cited ruling, witness testimony in these circumstances would only be admissible in situations not susceptible to proof by other means of evidence. Finally, it should be noted that the Respondent cannot allege the irrelevance of witness testimony and at the same time draw inferences from its testimony (see paragraphs 8 to 14 of the Respondent's Submissions).

LEGAL ANALYSIS

In accordance with the provisions of Article 608 of the CPC, ex vi Article 29 of the RJAT, "(…) the decision first addresses procedural issues that may result in the dismissal of the instance, according to the order imposed by their logical precedence. (…) ", and "(…) The judge must resolve all issues that the parties have submitted to his consideration, except those whose decision is prejudiced by the solution given to others; it may not deal with anything but the issues raised by the parties, except if the law permits or requires knowledge of other issues (…) ".

In these terms, it is necessary to first consider and decide, in the present arbitral proceedings, the exceptions raised by the Respondent.

On the Material Incompetence of the Arbitral Tribunal to Consider Part of the Request

The material incompetence of the Tribunal to consider the request constitutes a dilatory exception that prevents the continuation of the proceedings, leading to the dismissal of the instance as to the submissions in question, in accordance with the provisions of paragraph 2 of Article 576, subparagraph a) of Article 577 of the Code of Civil Procedure (CPC), applicable ex vi subparagraph a) of Article 29 of the RJAT.

The Respondent alleges the incompetence of the Arbitral Tribunal to "(…) some of the effects requested by the Claimant (see request) (…)", given that the Claimant petitions the "annulment of the decision dismissing the request for review of the IRS assessments for the years 2011 to 2013. From this drawing the consequence of (see request) the submission of «in consequence, the discretionary review of IRS for years 2011, 2012 and 2013, as requested on 28/12/2015, and the consequent refund of the amount of 17,997.67, with the modification resulting from the request submitted in Reply to the prior hearing, with the legal consequences» (our emphasis) ".

Concluding that not covered within the scope of the material competence of the Arbitral Tribunal would be the consideration of the matter relating to the implementation of decisions affecting the lawfulness of tax acts, the consideration of requests for recognition of rights not falling within the scope of the arbitral tribunal's competencies.

The arbitral tribunals have already ruled on the scope of their competencies regarding requests for discretionary review of tax acts[4], in particular in the arbitral decision which we transcribe[5]: "The arbitral process is an alternative means to the judicial impugning process (Article 124, paragraph 2, of Law No. 3-B/2010, of 28 April). The annulment or declaration of nullity or non-existence of assessment acts is a corollary of asserting their illegality and the purpose of the judicial impugning process (Article 124 of the CPPT), being in line with the constitutionally recognized right to challenge harmful acts (Article 268, paragraph 4 of the CRP), which amounts to the right to obtain judicial elimination of such acts. Thus, although Article 2, paragraph 1, subparagraphs a) and b), of the RJAT uses the expression "declaration of illegality" to define the competence of the arbitral tribunals operating in CAAD, not referring to condemnatory decisions, it should be understood that the powers that in judicial impugning proceedings are attributed to tax courts are comprehended in its competencies, which is the interpretation that is in line with the right to challenge harmful acts constitutionally assured and with the sense of the legislative authorization on which the Government based itself to approve the RJAT, in which it proclaims, as the first directive, that "the tax arbitral process should constitute an alternative procedural means to the judicial impugning process and to the action for recognition of a right or legitimate interest in tax matters". As can be seen from Article 2 of the RJAT, the competence of the arbitral tribunals operating in CAAD was defined by the RJAT only having regard to the type of acts that are the object of the taxpayers' submissions and not as a function of the type of issues that need to be considered to decide whether the acts are lawful or unlawful. For this reason, the requests for annulment referred to fall within the competencies of the arbitral tribunals operating in CAAD."

To that extent, and in light of the arbitral decisions listed, the arbitral tribunal understands that the consideration of the matter relating to the implementation of decisions affecting the lawfulness of tax acts will still be covered within the scope of the material competence of the Arbitral Tribunal.

Being so, the dilatory exception of material incompetence of the arbitral tribunal to consider the request does not succeed.

Consequently, the challenge to the case value indicated by the Claimant, corresponding to the amount of tax paid in excess as a result of the qualification of income earned as service provision instead of sales, does not succeed. The value will correspond not only to the amount of the IRS assessments issued in 2011, 2012 and 2013, whose lawfulness is being challenged, but will encompass all amounts to be refunded to the taxpayer[6], should the present request for arbitral award be judged to succeed. In such terms, the challenge to the case value (€ 17,997.67) indicated by the Claimant in the request for arbitral award does not succeed.

On the Failure to Comply with the Legal Formality Provided for in Article 59 of the CPPT

The Respondent further invokes that, having the Claimant entered in the Model 3 IRS Income Declarations for the years 2011 to 2014, inclusive, in field 403 the disputed values, declaring them as service provision and not as sales, he should have proceeded to replace said declarations, within the periods and limits set out in paragraph 3 of Article 59 of the CPPT.

Not having done so within the legal periods, the Claimant would have failed to comply with a legal formality. Therefore, the declarations submitted by the Claimant would become consolidated in the legal order and, to that extent, would not be susceptible to alteration through the request for discretionary review, as the Claimant attempted, under penalty of fraud against the law. That is, having failed to comply with the formality set out in Article 59 of the CPPT, the request for discretionary review could not serve to reopen the period for correction of the declaration that the Claimant allowed to lapse, as referred to in paragraph 6 of that rule.

Recall that, in accordance with the factuality found to be proven in the case, the Claimant only in 2015 became aware of the existence of possible errors in his Model 3 IRS declarations submitted within the legal periods, relating to the years 2011, 2012, 2013 and 2014. Once alerted to these errors by the new certified accountant, he submitted substitute declarations for the years in dispute. However, only the substitute declaration relating to 2014 was considered validated, with the respective assessment being issued in conformance. The declarations for 2011, 2012 and 2013 remained in the situation of "non-assessable declaration", given that the period provided for in subparagraph ii) of paragraph 3 of Article 59 of the CPPT would have been exceeded. As the substitute declarations were not processed, the Claimant submitted a request for discretionary review relating to the IRS assessments for 2011, 2012 and 2013.

Consider the wording of Article 59 of the CPPT, in force at the time of the facts:

"(…) 3. In case of error of fact or law in the declarations of taxpayers, these may be replaced:

a) Irrespective of the situation of the declaration to be replaced, if the legal period for its submission still remains;

b) Without prejudice to the contraventional liability that may apply, when this declaration results in tax higher or refund lower than previously computed, in the following periods:

i) Within 30 days following the end of the legal period, irrespective of the situation of the declaration to be replaced;

ii) Until the end of the legal period for gracious claim or judicial challenge of the assessment act, for the correction of errors or omissions attributable to taxpayers resulting in tax lower than that assessed based on the declaration presented;

iii) Up to 60 days before the end of the statute of limitations period, for the correction of errors attributable to taxpayers resulting in tax higher than previously assessed.

4 - (Repealed.)

5 - In cases where the errors or omissions to be corrected arise from disagreement between the taxpayer and the service in the qualification of acts, facts or documents invoked, in a substitute declaration submitted within the legal period for gracious claim, with relevance for the assessment of tax or well-founded doubt as to the existence of said acts, facts or documents, the head of finance must convert the substitute declaration into a gracious claim of the assessment, notifying the taxpayer of the decision.

6 - The submission of substitute declarations cannot result in the extension of the periods for gracious claim, judicial challenge or review of the tax act, which would be applicable if they had not been submitted.

7 - Whenever the competent entity becomes aware of tax facts not declared by the taxpayer and of the evidentiary support necessary, the assessment procedure is instituted ex officio by the competent services (…)."

The question that arises is whether the Claimant failed to comply with any legal formality provided for in Article 59 of the CPPT, as the Respondent contends.

It follows from the wording of paragraph 3 of Article 59 that, "In case of error of fact or law in the declarations of taxpayers, these may be replaced (…) "[7]. Therefore, the taxpayer has the faculty of submitting substitute declarations, within the periods provided for by the CPPT.

It does not follow from this rule the imposition of a legal obligation to submit substitute declarations, if the declarations submitted are affected by errors of fact or law.

The failure to submit substitute declarations does not prevent the taxpayer from reacting against assessments that have resulted from declarations with errors, of fact or law, provided that he does so within the periods and in accordance with the mechanisms of reaction provided for by law.

In the same sense, see the decision of the STA in a recent ruling, "It should be noted, finally, that the lapse of the period for submitting a substitute declaration does not mean that the Appellant was prevented from asserting its right to react against the assessment. If, as it contends, there was an error regarding the taxable profit it determined in the declaration it submitted for the purposes of the corporate income tax of the year 2006, it could always have challenged the self-assessment (…) with that ground, it being sufficient for it to submit a gracious claim first, as required by Article 131, paragraph 1, of the CPPT (…)"[8][9]

The arbitral tribunals operating in CAAD have also ruled in the same sense: "The Tax and Customs Authority believes that for the discretionary review of the tax act to be viable it is necessary to submit a substitute declaration in accordance with Article 59 of the CPPT. However, as results from Article 78 of the LGT, the review of tax acts does not even depend on the initiative of taxpayers, and can be carried out «by the initiative of the tax authority, within four years of the assessment or at any time if the tax has not yet been paid, on the grounds of error attributable to the services» (paragraph 1 of this article). On the other hand, from paragraph 7 of the same article it follows that, despite review being called «discretionary», the taxpayer can trigger the review by the Tax Authority, through a request for its realization, which is confirmed by paragraph 1 of Article 49 of the LGT by making reference to the «request for discretionary review of the tax assessment». Thus, there is no legal support for making the discretionary review requested by request dependent on the prior submission of a substitute declaration."[10]

Nor should it be said that, by not having submitted substitute declarations, the declarations became consolidated in the legal order. Certainly, because the AT could call into question the resulting IRS assessments, until the end of the respective statute of limitations period, by issuing additional IRS assessments.

In sum, it does not follow from Article 59 of the CPPT the imposition of the obligation to submit a substitute declaration ("necessary") in order for the taxpayer to access means of administrative defense.

Paragraph 6 of Article 59 merely provides that, from the submission of substitute declarations, there cannot result the extension of periods for gracious claim, challenge or review of the tax act.

Having the substitute declarations been submitted beyond the period provided for in paragraph 3 of Article 59, they did not produce any effect on the Claimant's tax situation, given that they remained in the situation of "non-assessable declarations". Therefore, the submission thereof would not have resulted in the extension of the period for review of the tax act.

In light of all the above, the exception raised by the Respondent of failure to comply with legal formality does not succeed.

On the Untimeliness of the Request for Discretionary Review and the Failure to Meet Requirements for Consideration of the Request for Discretionary Review

The Respondent further invokes the untimeliness of the request for discretionary review submitted on 28/11/2015, due to violation of the periods contained in Article 78 of the LGT.

In fact, the Respondent understands that the request for discretionary review is untimely due to violation of the period provided for in paragraph 1 of Article 78 of the LGT, to the extent that the 4-year period will not be applicable given that, in the case at hand, there is no error attributable to the services. If an error exists, according to the Respondent, it would be exclusively attributable to the Claimant himself at the time of submitting the income declaration and within the scope of the values declared.

Regarding the possibility of applying the exceptional 3-year period for submitting the request for discretionary review, in accordance with paragraph 4 of Article 78 of the LGT, on the grounds of serious or notorious injustice, the Respondent understands that it would similarly not apply given that it requires that the error not be attributable to negligent conduct on the part of the Claimant.

Therefore, it concludes that as there is no error attributable to the services, the legal procedural requirements on which the request for discretionary review depends, to be made within 4 years, in accordance with the provisions of Article 78, paragraph 4 of the LGT, are not met.

Consider the wording of Article 78 of the LGT[11] in force at the time of the submission of the request:

"1 - The review of tax acts by the entity that performed them may be carried out by the initiative of the taxpayer, within the period for administrative gracious claim and on the grounds of any illegality, or by the initiative of the tax authority, within four years of the assessment or at any time if the tax has not yet been paid, on the grounds of error attributable to the services.

2 - Without prejudice to the legal burdens of gracious claim or challenge by the taxpayer, error in self-assessment is considered attributable to the services for the purposes of the preceding paragraph.

3 - The review of tax acts in accordance with paragraph 1, independently of whether it is a material or substantive error, implies its proper recognition in accordance with paragraph 1 of the preceding article.

4 - The head of the service may authorize, exceptionally, within three years following the year of the tax act, the review of the taxable matter determined on the grounds of serious or notorious injustice, provided that the error is not attributable to negligent conduct on the part of the taxpayer.

5 - For the purposes of the preceding paragraph, only ostensible and unequivocal notorious injustice and serious injustice resulting from manifestly exaggerated and disproportionate taxation with reality or from which high prejudice resulted to the National Treasury are considered. (…)"[12]

There exists at the date of issuance of the present ruling extensive case law from the higher courts and from the arbitral tribunals operating in CAAD on the request for review of the tax act provided for in Article 78 of the LGT.

Thus, the request for review of the tax act, under the final part of paragraph 1 of Article 78, may be submitted within a 4-year period, even by initiative of the taxpayer, now Claimant, provided that on the grounds of "error attributable to the services".

Regarding what constitutes "error attributable to the services", it is constant case law of the higher courts that such is an error of law and not a mere mistake or material error[13].

As Professor Rui Duarte Morais teaches, "When the assessment is carried out by the tax administration, we can state, as a rule, that the deficient application of the law to the concrete case – error of law – is attributable to the services. (…) However, it must be taken into account that the completion of declarations has implicit a certain degree of legal qualification of the facts. If, for example, in his IRS declaration, the taxpayer included in the "annex" relating to taxable capital gains a capital gain not subject to taxation, the tax administration (the computer system) will carry out the assessment in conformity with what was declared, determining an excessive amount of tax. It seems to us that, even for reasons of systemic consistency with what happens in self-assessment situations, that this error (which is an error of law) should be considered as attributable to the services. In the case of self-assessment, the law expressly equates, albeit only for purposes of review, the error (of fact or law) committed by the taxpayer to an error committed by the services."[14][15]

Thus, in the case sub judice, it will be necessary to ascertain whether the errors evidenced in the IRS declarations will be attributable to the services, or, as the Respondent contends, whether they will be attributable to the Claimant.

In the context of IRS, the principle of taxpayer declaration applies[16]: which means that to the taxpayer belongs the initial drive in the assessment procedure with the submission of the declaration "The Portuguese tax system thus enshrines the method of taxpayer declaration in the determination of taxable matter (Articles 57 to 61 of the CIRS, 16 of the CIRC and 28 to 40 of the CIVA). (…) Therefore, when the declaration of the taxpayer is in accordance with the elements in his accounting or accounts, this shows itself to be organized in accordance with the law and there are no errors, inaccuracies or other well-founded indications that it does not correspond to reality, it is presumed that the declared taxable matter is the real one. And, as results from the provisions of Article 38 of the CIRS, the AT may only correct the declarations of taxpayers and proceed with the corresponding additional assessment when it substantively considers that it contains a tax lower than that due". [17][18]

Indeed, "the IRS is a "heterogeneous assessment" tax, with assessment being the responsibility of the DGCI (Article 75.º)"[19].

Within the scope of that responsibility, the AT has the faculty to request clarifications on the declarations submitted, proceed to corrections in case of errors evidenced in them and correct the assessments, to the extent provided for in the IRS Code.

As assessment, in the strict sense, is the tax act par excellence that is the responsibility of the AT, with the issuance thereof, the AT accepts the qualification and quantification of income contained in the IRS declarations submitted by the now Claimant, relating to the tax years 2011, 2012 and 2013. Not having proceeded with any correction at the time of submission of the declarations, nor having requested any additional clarification, subsequently, as was its responsibility, the services conformed themselves to the income declarations, transforming them into tax assessments.

In the case sub judice, we are dealing with an error of law – qualification of income earned by the Claimant as sales instead of service provision – an error evidenced in the declarations submitted by the Claimant, but which cannot fail to be considered attributable to the services, for the purpose of requesting review of the tax act.

Therefore, it can be concluded that in the case at hand there exists an error of law, which by being considered as "attributable to the services", will allow its review within a 4-year period counted from the date of the IRS assessments. To that extent, having the request for discretionary review been submitted on 28/11/2015, the same is timely, given that the 4-year period had not been exceeded with respect to any of the IRS assessments in dispute.

Thus, the analysis of the timeliness of the request for review under the provisions of paragraph 4 of Article 78 of the LGT, that is, on the grounds of serious or notorious injustice, is rendered unnecessary.

Therefore, the alleged untimeliness of the request for discretionary review of the tax act and the failure to meet the requirements for consideration of the request for discretionary review do not succeed.

On Venire Contra Factum Proprium

Lastly, the Respondent alleges that both the request for discretionary review and the request for arbitral award formulated by the Claimant translate into the exercise of a legal position that contradicts the conduct previously assumed and constitutes an abuse, set out in Article 334 of the Civil Code.

Abuse of rights is a typical legal figure of civil law, with Article 334 of the Civil Code establishing that: "It is unlawful to exercise a right, when the holder manifestly exceeds the limits imposed by good faith, good customs or the social or economic purpose of that right".

On the application of this civil law figure to public law, notably to tax law, see the Ruling of the STA of 2010 which decided in the following terms in a similar situation. "(…)Now, in the case at hand, we are dealing with public law – tax law – in which taxpayers and other tax obligors enjoy, by force of constitutional law and ordinary law, a set of guarantees for defense against unlawful acts of the tax authority. And note that the renunciation of some of these rights, namely the right of challenge or appeal, face limitations (see Article 96 of the LGT). The Appellant, in the concrete case, enjoyed the right to challenge self-assessment acts regulated in Article 131 of the CPPT. This right is further reinforced if we take into account that Article 78, paragraph 2 of the LGT considers error in self-assessment attributable to the services, for the purposes of review of tax acts." [20]

Concluding that "From this it follows then that, as the appellant legally enjoys the right to gracious claim and subsequent judicial challenge, the trust referred to in the above ruling is not called into question. In fact, even having the appellant submitted the substitute declarations as found to be proven, the Public Treasury could not – nor should – trust or presume that the situation would be definitively settled, since there had been no express renunciation by the appellant of the exercise of her rights. Thus, there was only the exercise of a right legally conferred on the appellant, with no reason to speak of any violation of trust created by the conduct of the appellant to the Public Treasury, so the invoked abuse of rights does not occur. (…)"[21][22]

A position which we endorse and which is entirely applicable to the case at hand.

Therefore, in the case sub judice, the figure of abuse of rights cannot be invoked to limit the rights of gracious claim and judicial appeal enshrined in Article 96 of the LGT, a corollary of the constitutional principle provided for in paragraph 4 of Article 268 of the Constitution of the Portuguese Republic.

In such terms, the exception of abuse of rights as invoked by the Respondent does not succeed.

On the Illegality of the Dismissal Order for Lack of or Insufficient Reasoning and for Erroneous Qualification and Quantification of Income

For his part, the Claimant attributed two defects to the tax acts: i) defect of violation of law, due to erroneous qualification and quantification of income, and ii) defect of lack of or insufficient reasoning of the order dismissing the request for discretionary review of the tax acts.

As provided for in paragraph 2 of Article 124 of the CPPT ex vi subparagraph c) of Article 29 of the RJAT and following the case law of the STA, "(…), the possible success of violation of law provides more stable and effective protection to the interested party, since it generally prevents the renewal of the act. Hence, in accordance with the case law of this Supreme Court, except in cases where the content of the act cannot be grasped, particularly in case of lack of reasoning, one should begin by examining defects of violation of law (stricto sensu) (In this sense see, among others, the Rulings of this Court of 22.09.1994 – Case No. 32.702, of 07.02.1996 – Case No. 15.887, of 23.04.1997 – Case No. 35.367, of 18.09.2008 - Case No. 0437/08, of 07.12.2010 - Case No. 0569/10, of 22.03.06 –Case No. 0916/04 and of 24.01.2007 –Case No. 0939/06)."[23]

Thus, the central question to be decided by the arbitral tribunal consists in considering the lawfulness of the IRS assessments for the years 2011, 2012 and 2013, with respect to the application of the coefficients provided for in paragraph 2 of Article 31 of the IRS Code, to the income of category B, earned by the Claimant, from the exercise of his activity as a dental prosthetics technician.

The Claimant seeks the qualification of income earned as sales, to which the coefficient of 0.20 would apply, for the purposes of determining category B income, contrary to the coefficient applied (0.70 applied in 2011 and 2012; 0.75 applied in 2013).

For his part, the AT argues that the Claimant's activity consists of typical service provision involving the manufacture of prostheses, with application of materials, so all income earned by the Claimant under category B IRS constitutes, in its entirety, income from service provision, to which the coefficient of 0.70, in the years 2011 and 2012, and 0.75, in 2013, should apply, and not a coefficient of 0.2, applicable to income resulting from sales conducted.

With respect to the definition of Category B income, reference should be made to the provisions of Articles 3 and 4 of the IRS Code (wording in force at the time of the facts):

"Article 3

Category B Income

1 - Business and professional income shall be considered:

(…)

a) Income arising from the exercise of any commercial, industrial, agricultural, forestry or livestock activity;

b) Income earned in the exercise, on a self-employed basis, of any service provision activity, including those of a scientific, artistic or technical character, whatever their nature, even if connected with activities mentioned in the preceding subparagraph; (Wording given by Law No. 32-B/2002, of 30 December)";

"Article 4

Commercial and industrial, agricultural, forestry and livestock activities

1 - Commercial and industrial activities shall be considered, in particular, the following:

a) Purchase and sale;

b) Manufacturing; (…)".

The rules applicable to the determination of category B income, in accordance with the simplified regime, are provided for in Article 31 of the IRS Code.

This regime provides that the determination of taxable income will result from the application of objective indicators based on scientific and technical grounds for the different sectors of economic activity (see paragraph 1 of Article 31 of the IRS Code).

However, until the approval of such indicators, or in their absence, the following rule is established in paragraph 2 of Article 31 of the IRS Code: "(…) taxable income is obtained by adding (…) the amount resulting from the application of the coefficient of 0.20 to the value of sales of goods and products and the coefficient of 0.70 to the remaining income from this category, excluding the variation in production (…)"[24][25]..

This latter coefficient was changed to 0.75[26], applying to income earned from 2013, inclusive.

Therefore, in the absence of objective indicators based on scientific and technical grounds referred to above for the years 2011, 2012 and 2013, for the purposes of determining taxable income in the context of the simplified tax regime, the above-mentioned coefficients shall apply.

Now, the coefficient of 0.20 will only apply to "sales of goods or products", with the coefficient of 0.70 or 0.75 applicable to the remaining income from category B.

It is therefore a matter of interpreting the rule provided for in the legal statement contained in the final part of paragraph 2 of Article 31 of the IRS Code, in the wording in force in the years 2011, 2012 and 2013, inclusive, in order thereby to determine whether the income earned by the Claimant falls or does not fall within the concept of "sales of goods or products".

For this purpose, it will be necessary to analyze and interpret the applicable legal rules, considering the general rules and principles of interpretation of the laws, in particular Article 9 of the Civil Code (CC), as well as the specific rules for the interpretation of tax laws provided for in paragraphs 2 to 4 of Article 11 of the LGT.

In the absence of definitions in the IRS Code, more precisely for purposes of application of the simplified regime, or in other tax rules, and dealing with a term proper to another branch of law – in casu the law of obligations – reference should be made to the definitions contained in the Civil Code.

The sale "(…) is the contract by which ownership of a thing, or other right, is transferred, in exchange for a price" (see Article 874 of the CC).

Therefore, the essential effects of the contract of sale are: a) the transfer of ownership of the thing or the title to the right; b) the obligation to deliver the thing; c) the obligation to pay the price (see Article 879 of the CC).

The contract for service provision, on the other hand, is "one in which one of the parties undertakes to provide the other with a certain result of his intellectual or manual work, with or without compensation"[27], with a contract for services being one of the modalities of the contract for service provision (see Articles 1154 and 1155 of the CC).

For its part, the contract for services "(…) is the contract by which one of the parties undertakes in relation to the other to carry out a certain work, by a price", with "The materials and instruments necessary for the execution of the work must be supplied by the contractor, unless otherwise agreed or customary" (see Article 1207 and paragraph 1 of Article 1210 of the CC).

Therefore, the essential element in the contract of sale will consist in the transfer of ownership of a thing, transformed or not, whereas in the contract for services it will be the execution of a work, intellectual or manual, by a price.

Regarding the practical difficulty of distinguishing between the contract of sale and the contract for services in the form of a service contract, see the Ruling of the Supreme Court of Justice in Case No. 05B1396, dated 09-06-2005: "(…) The cited authors (Professors Pires de Lima and A. Varela, in "Código Civil Anotado, vol II, 4ª ed."), in ob cit, page 865, warn, however, that it is not very easy to distinguish, at times, between the service contract and the sale, although they are contracts with different objects: the former gives rise to an obligation of performance of a fact - the execution of the work; the latter results in the transfer of ownership of a thing or other right. The issue arises only in cases where the materials are supplied by the contractor, and raises itself, above all, when the value of the materials exceeds the value of the work. In principle, in our law the supply of the materials necessary for the execution of the work does not alter the nature of the contract, as clearly results from Articles 1210 and 1212, the first of which even places the supply of the materials and instruments necessary for the execution of the work normally at the charge of the contractor". The regime itself arising from these two articles differs from the regime of the sale. Thus, the transfer of ownership of the materials occurs at the moment of delivery of the work, and not by effect of the contract, as would happen if it were a sale. (…) There are cases in which the transaction is much closer to the sale than to the service contract. "The decisive criterion is that there is a service contract, if the supply of the materials is merely a means for the execution of the work, and the work constitutes the purpose of the contract. On the other hand, there is a sale, if the work is simply a beginning to achieve the transformation of the matter". (Equally so). (…)[28].

The administrative and tax courts have also been called upon to rule on this subject precisely for the purposes of applying the coefficient provided for in paragraph 2 of Article 31 of the IRS Code.

See in this regard the ruling of the STA in Case No. 379/2016, "(…), for the purposes of applying the coefficients provided for in the aforementioned paragraph 2 of Article 31 of the CIRS (in the wording then in force), the activity developed by the taxpayer (service provision) was relevant, not influencing this qualification, given the facts found to be proven, the circumstance that materials supplied by the service provider were incorporated, because we are dealing with true service provision, even if with the incorporation of goods previously acquired."[29][30]

In the same sense, there are several rulings of the Central Administrative Court of the North ("TCAN"), in particular the ruling No. 01505/04.0BEVIS cited by the Respondent:"(…) Now, this does not constitute a typical sale operation that has as its essential object the transfer of goods, that is, the transfer of ownership of the goods and products to the purchaser whose main, if not sole interest, is its acquisition, although it may imply some accessory activity on the part of the supplier with respect to the good supplied, namely installation or assembly – cf. Article 874 of the Civil Code. (…) Thus, the service contract, differently from the sale, has as its essential element the execution of a work, by a price. The operations that the case file reveals are to be qualified as typical service provision in which the appellant, in the development of his activity, arranges with the client work of finishes or other construction work, undertaking to carry them out with the application of materials and labor supplied by him, which he invoices separately. But the fact that he does so does not legally characterize the operations, nor their economic substance of the activity based on such operations, as true service provision and not sales of material goods.(…)"[31].

From this it follows that the main difference between the sale of goods or products and the service contract is the object of the contract, which, in the latter case, is an obligation of performance of a fact – the execution of a work – at the end of which the transfer of ownership of a thing or other right will be given, whereas in the contract of sale the essential object is the transfer of ownership of the goods, transformed or not, which operates by mere effect of the contract.

Now, in the case sub judice, as results from the evidence, the Claimant in the course of his activity as a dental prosthetics technician acquires (from May 2012), raw materials (polymers, monomers, screws, welds, plasters, etc.) which he uses to manufacture dental prostheses, at the request of dental clinics and laboratories, under strict individualized specifications, adapted to the clients.

In fact, it can be concluded that the clinics and laboratories contract with the Claimant an obligation of performance of a fact, that is, the execution of a "work" – dental prosthesis –, which incorporates raw materials supplied by the Claimant (from May 2012), at the end of which the transfer of ownership over it will be given.

In light of the aforementioned rules, the arbitral tribunal understands that the activity exercised in 2011, 2012 and 2013 cannot be classified as a mere sale of goods or products, as sought by the Claimant. It is, instead, a contract for service provision, in the form of a service contract for movable property, to be classified, therefore, in subparagraph a) of paragraph 2 of Article 3 of the IRS Code and in the final part of paragraph 2 of Article 31 of the IRS Code.

Moreover, it should be noted that, between 2011 and May 2012, the Claimant did not acquire the raw materials he used in his activity, which were provided to him, free of charge, by a client, so in this case there will be no doubt about the nature of the contract concluded with that client.

Therefore, as the income earned does not result from an activity of buying and selling goods or products, the coefficient of 0.20 will not apply, but rather the coefficient of 0.70, in the years 2011 and 2012, and 0.75, in 2013, relating to the remaining activities of category B, as per the Model 3 income declarations submitted in a timely manner and IRS assessments subsequently issued.

In this conformity, the present request for arbitral award for a declaration of illegality of the IRS assessments for 2011, 2012 and 2013 does not succeed, with all legal consequences, including the right to interest.

Regarding the alleged lack of or insufficient reasoning of the order dismissing the request for review of the tax acts, it should be noted that the duty to provide reasoning is a constitutional imperative (paragraph 3 of Article 268 of the CRP), concretized, among others, by the provisions of Article 77 of the LGT.

Article 77 establishes the duty to provide reasoning for tax acts "by means of a succinct statement of the factual and legal reasons that motivated it, with the reasoning consisting of mere declaration of agreement with the grounds of previous opinions, information or proposals, including those forming part of the tax audit report".

It being that, in accordance with paragraph 2 of the same provision, "The reasoning for tax acts may be carried out in summary form, and must always contain the applicable legal provisions, the qualification and quantification of the tax facts and the operations for the determination of the taxable matter and the tax".

However, as Rui Duarte Morais teaches, "The reasoning of the act must also be accessible, (…). The reasoning must also be exhaustive, that is, it must allege the verification of all the assumptions on which the law makes the legality of the act in question depend. (…) The content, the depth required of the reasoning necessarily depends on the specific case. Normally it is stated that the reasoning must be express, clear, congruent and sufficient. What is required is – using a common saying of our case law – that the reasoning allows a normal recipient to understand the cognitive and evaluative itinerary contained in the act, so that it is known why this decision was made and not another. (…) This will consist, essentially, in the demonstration of the verification in the specific case of the hypothesis of the legal rule, there being no place for the motivation of the concrete content of the decision (the explanation of the reasons why it was decided in this sense and not another), because, as a rule, the decision (the only possible one) to be made results directly from the law. Hence the express provision, in paragraph 2 of Article 77 of the LGT of simplified reasoning". [32][33]

In the same sense of the cited ruling, see the Ruling of the STA of 14-02-2013 in Case No. 645/12, which is transcribed below: "Tax law, in the implementation it makes of the right constitutionally guaranteed to the reasoning of administrative acts (Article 268, paragraph 3 of the Constitution of the Republic), specifically admits that this can be done in summary form, provided it contains the applicable legal provisions, the qualification and quantification of the tax facts and the operations for the determination of the collectable matter and the tax, and it is also admitted that it can be done by reference (see paragraphs 1 and 2 of Article 77 of the LGT), (…) (see J.L. Saldanha Sanches/João Taborda da Gama, «Audição-Participação-Fundamentação: a co-responsabilização do sujeito passivo na decisão tributária», in Homenagem José Guilherme Xavier de Basto, Coimbra, 2006, pp. 290/297 and J.L. Saldanha Sanches, A Quantificação da Obrigação Tributária: Deveres de Cooperação, Autoavaliação e Avaliação Administrativa, Lisboa, 1995, pp. 189/202). What is essential is that the ultimate purposes aimed at with the requirement of reasoning not be frustrated: rationality of the decision and creation of the material conditions for the adequate exercise of defense rights by taxpayers (…)." [34][35]

Thus, considering the order dismissing the request for discretionary review of the Claimant's IRS assessments for 2011, 2012 and 2013, it is necessary to ascertain whether the AT complied with the duty to provide reasoning provided for in paragraph 2 of Article 77 of the LGT.

As mentioned above, the reasoning, in order to be sufficient, clear and precise, must allow a normal recipient to understand the cognitive and evaluative itinerary contained in the act, so that it is known why this decision was made and not another.

It results from all the above that the Claimant did not see his defense rights frustrated by the manner in which the duty to provide reasoning was exercised by the Respondent in the order dismissing the IRS assessments for 2011, 2012 and 2013. In fact, it is constant case law of the higher courts that, for the duty to provide reasoning to be considered fulfilled, it is sufficient that the Claimant understood the cognitive and evaluative itinerary contained in the act, in a manner allowing him to contest it either by way of administrative gracious claim or by contentious proceedings, which came to happen with the submission of the present request for arbitral award.

Therefore, the defect of lack of reasoning of the order dismissing the request for discretionary review invoked by the Claimant does not succeed.

DECISION

In these terms, this arbitral tribunal decides:

To judge the exceptions raised by the Respondent to be without merit;

To judge the request for arbitral award to be without merit and, consequently, to uphold the tax assessment acts for Personal Income Tax for the years 2011, 2012 and 2013, dismissing the action as against the Tax and Customs Authority;

To judge the request for compensatory interest to be without merit, dismissing the action as against the Tax and Customs Authority;

To condemn the Claimant to bear the procedural costs.

CASE VALUE:

In accordance with the provisions of Article 306, paragraphs 1 and 2 of the CPC and of subparagraph a) of Article 97-A, paragraphs 1 and 2 of the CPPT, applicable by force of subparagraphs a) and b) of Article 29, paragraph 1 of the RJAT and of paragraph 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings (RCPTA), the case value is fixed at € 17,997.67 (seventeen thousand nine hundred ninety-seven euros and sixty-seven cents).

COSTS

In accordance with paragraph 2 of Article 12 and paragraph 4 of Article 22, both of the RJAT, and paragraph 4 of Article 4 of the aforementioned Regulation, the arbitration fee is fixed at €1,224.00 (one thousand two hundred twenty-four euros), in accordance with Table I of the RCPTA, to be borne by the Claimant, given the dismissal of the request for annulment of the tax acts that are the subject of the case.

Notify this arbitral decision to the parties and file the case.

Lisbon, 17 October 2017

The Sole Arbitrator,

(Vera Figueiredo)

Document drafted by computer, in accordance with paragraph 5 of Article 131 of the Code of Civil Procedure, applicable by reference to subparagraph e) of Article 29, paragraph 1 of the RJAT, written according to the spelling of the Orthographic Agreement of the Portuguese Language, approved by Resolution of the Assembly of the Republic No. 26/91 and ratified by Decree of the President of the Republic No. 43/91, both of 23 August.

[1] See Classification of Portuguese Economic Activities, Revision 3 (CAE-Rev.3), approved by Decree-Law No. 381/2007, of 14 November, available at "http://smi.ine.pt"

[2] Ruling of the TCAN No. 02600/09.4BEPRT, of 16-02-2017, available at www.dgsi.pt

[3] Ruling of the TRG No. 3388/15.5T8BRG.G1, of 11-07-2017, available at www.dgsi.pt

[4] See Arbitral Decision in Case No. 299/2013-T, dated 10-10-2014, in Case No. 630/2014-T, dated 04-03-2015, and in Case No. 69/2016, dated 26-09-2016, available at https://caad.org.pt;

[5] See Arbitral Decision in Case No. 69/2016, dated 26-09-2016, available at https://caad.org.pt;

[6] Ruling of the TCAS No. 07125/13, of 13-03-2014, available at www.dgsi.pt

[7] Emphasis ours.

[8] Ruling of the STA in appeal No. 0159/14, dated 13-01-2016, available at www.dgsi.pt

[9] Emphasis ours

[10] Arbitral decision in Case No. 27/2016-T, dated 29-06-2016, available at www.caad.org.pt/

[11] Wording given by Law No. 60-A/2005, of 30 December.

[12] Emphasis ours.

[13] See the Ruling of the STA, of 22-03-2011, in appeal No. 01009/10, cited by Rui Duarte Morais in the Manual of Tax Procedure and Process, Almedina, 2014

[14] Ibidem

[15] In contrary sense, Ruling of the TCAS in Case No. 887/11.1BELRA, of 6-04-2017, available at www.dgsi.pt

[16] For a more detailed explanation of the principle of taxpayer declaration, in the context of IRS, we refer to the Ruling of the TCAS in Case No. 01076/03, available at www.dgsi.pt

[17] See Ruling of the TCAS of 03-05-2005, in Case No. 01076/03, available at http://www.dgsi.pt/

[18] In the same sense, see Ruling of the TCAN of 12-10-2006, in Case No. 00277/04, available at http://www.dgsi.pt/: "As ALFREDO JOSÉ DE SOUSA and JOSÉ DA SILVA PAIXÃO say, «A declaration is an act by which the taxpayer brings to the knowledge of the Tax Administration the existence of the taxable matter that integrates the tax fact, indicating its amount and all the elements necessary for the calculation of the tax (expenses, deductions, etc.). The declaration is required by law and represents an act of cooperation by the taxpayer given the public nature of the tax justified by the idea that the tax obligation is not a voluntary obligation, contractual, but the fulfillment of a legal duty. It is a mandatory act and if the taxpayer, being in the conditions provided for in the law, does not comply with it, is subject to sanctions (Articles 31 and 32 of the RJIFNA)[(() Today the failure to submit declarations is provided for as a violation by Article 117 of the General Tax Violations Scheme (RGIT), approved by Law No. 15/2001, of 5 June, in the wording given to it by Declaration of Rectification No. 15/2001, of 4 August.)]. The declaration is a sufficient basis for the imposition and is an element justifying the corresponding receipt. In addition to being an obligation of the taxpayer, it represents proof of taxable matter» (() Code of Tax Procedure Commented and Annotated, 3rd edition, note 4 to Article 76, page 162.)".

[19] Manuel Pires and Rita Calçada Pires, in Tax Law, pages 450-455, 5th Edition, Almedina 2016

[20] Ruling of the STA in appeal No. 03/10, of 28-04-2010, available at http://www.dgsi.pt.

[21] Idem

[22] Emphasis ours.

[23] Ruling of the STA in appeal No. 0355/11, dated 6-07-2011, available at http://www.dgsi.pt; in the same sense, Ruling of the STA in appeal No. 0100/2016 of 18-05-2016.

[24] Emphasis ours.

[25] Wording given by Law No. 3-B/2010, of 28 April.

[26] Wording given by Law No. 66-B/2012, of 31 December.

[27] Emphasis ours.

[28] Ruling of the Supreme Court of Justice in Case No. 05B1396, dated 09-06-2005, available at http://www.dgsi.pt;

[29] Ruling of the STA in Case No. 379/2016, dated 26-11-2016, available at http://www.dgsi.pt;

[30] Ruling of the STA in Case No. 1238/2016, dated 15-02-2017, available at http://www.dgsi.pt;

[31] Ruling of the TCAN in Case No. 01505/04.0BEVIS, dated 14-07-2016, available at http://www.dgsi.pt;

[32] See Rui Duarte Morais, Manual of Tax Procedure and Process, Almedina 2014

[33] Emphasis ours.

[34] See also Rulings of the STA of 24-02-2016 in Case No. 0329/2014 and of 09-03-2016 in Case No. 0805/15, available at http://www.dgsi.pt.

[35] Emphasis ours.