Process: 109/2016-T

Date: October 7, 2016

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD Process 109/2016-T addresses whether Art. 90(10) of the Portuguese Corporate Income Tax Code (CIRC) applies to limit deduction of tax losses when a company files its IRC Model 22 declaration late but before assessment. The claimant challenged an additional IRC assessment for 2011 that disallowed declared tax losses totaling €1,814,918.67, reduced to €1,204,976.64. The central legal issue concerns the scope of Art. 90(10) CIRC, which restricts deductions to those known by the Tax Authority when deemed or indirect assessment methods under Art. 90(1)(b) or (c) are applied. The taxpayer argued that Art. 90(10) only applies when no declaration is filed or when the Tax Authority must determine taxable income through indirect methods without relying on taxpayer declarations. Since the Tax Authority based its assessment on values actually declared in the late-filed Model 22 return—accepting all declared amounts except tax losses—the claimant contended this constituted an improper instrumentalization of Art. 90(10) CIRC. The case raises fundamental questions about whether late filing automatically triggers Art. 90(10)'s restrictive regime even when the Tax Authority processes the declaration under Art. 90(1)(a) rather than applying true indirect assessment methods, and whether selective application of Art. 90(10) to only one declared item violates principles of legality, equality, proportionality and good faith in tax administration under Art. 55 of the General Tax Law.

Full Decision

ARBITRAL AWARD

The arbitrators Fernanda Maçãs (presiding arbitrator), Luís Oliveira and Nuno Miguel Morujão, appointed by the Ethics Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 12/5/2016, hereby agree to the following:

I. Report

  1. The taxpayer A…, LDA, with tax identification number … (hereinafter "Claimant"), filed, on 25/2/2016, a petition for constitution of a Collective Arbitral Tribunal, in accordance with the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter "RJAT"), in which the Tax and Customs Authority (hereinafter "AT" or "Respondent") is named as the Respondent.

  2. The Claimant brings a request for declaration of illegality of the tax act of additional assessment of Corporate Income Tax No. 2015…, notified on 22/12/2015, which includes the assessment of the corresponding municipal surcharge, default interest and compensatory interest, performed by the Director-General of the Tax and Customs Authority (hereinafter "AT"), as a consequence of the aforementioned "Correction to the value of deductible tax losses Period of 2011".

  3. The petition for constitution of the Arbitral Tribunal was accepted by the President of CAAD and automatically notified to the AT on 11/3/2016.

The Claimant did not appoint an arbitrator, whereby, in accordance with the provisions of paragraph (a) of Article 2 and paragraph (b) of Article 1 of the RJAT, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the President of the Ethics Council appointed as arbitrators of the Collective Arbitral Tribunal the present signatories, who communicated acceptance of their appointment within the applicable deadline.

On 27/4/2016, the parties were notified of the appointment of arbitrators and raised no objections.

In accordance with the provision of paragraph (c) of Article 11 of the RJAT, the Collective Arbitral Tribunal was constituted on 12/5/2016.

In these terms, the Arbitral Tribunal is properly constituted to appreciate and decide the subject matter of the case.

  1. To support the request for arbitral pronouncement, the Claimant alleges, in summary:

Article 10 of Article 90 of the CIRC, "the foundational rule of the «Correction to the value of deductible tax losses - Period of 2011» carried out by the Tax Authority (…) determines that «To the amount ascertained under paragraphs (b) and (c) of Article 1 only those deductions are made of which the tax administration is aware and which may be effected in accordance with Articles 2 to 4" (23rd of the Initial Petition; the underlining is the Claimant's), and has as its "objective scope of application (…) situations in which the subjects of this tax have not submitted their respective Corporate Income Tax Declaration Model 22 and in which the Tax Authority is compelled to assess the tax due officially based on fictitious taxable matter or based on the elements at its disposal (it is not required, in these cases, that the deductions to the Corporate Income Tax collected by the Tax Authority go beyond those of which it has actual knowledge)" (26th of the Initial Petition).

Therefore, "outside the scope of application of that legal rule shall remain (…) all other cases in which the assessment of Corporate Income Tax is carried out based on the taxable matter ascertained by the taxpayer itself in its Corporate Income Tax Declaration Model 22, in the terms provided for in Article 90, Article 1, paragraph (a), of the Corporate Income Tax Code, situations in which it shall be incumbent upon the Tax Authority, downstream, to confirm the validity and correctness of the elements thus declared (in particular, Article 1 of Article 16 of the Corporate Income Tax Code determines that taxable matter is, as a rule, determined on the basis of a statement by the taxpayer, without prejudice to its control by the tax administration»)" (27th of the Initial Petition).

Given that "the «Correction to the value of deductible tax losses - Period of 2011» carried out by the Tax Authority was based on the values declared by the CLAIMANT within its Corporate Income Tax Declaration Model 22 relating to the 2011 tax year, affecting, in particular, the tax losses declared and implying the consequent correction of the amount of taxable matter ascertained in that forum" (31st of the Initial Petition), "it follows (…) that the amount subject to correction by the Tax Authority was not ascertained, either in accordance with paragraph (b) of Article 1 of Article 90 of the Corporate Income Tax Code, nor in accordance with paragraph (c) of the same legal provision, but, on the contrary, based on the Corporate Income Tax Declaration Model 22 submitted by the CLAIMANT" (32nd of the Initial Petition), which "prevents, preliminarily, the application of the regime provided for in Article 10 of Article 90 of the Corporate Income Tax Code in the specific case, for the respective applicable requirements are not met, that is to say, because the corrected amount did not result from the application of paragraph (b) or (c) of Article 10 of Article 90 of the Corporate Income Tax Code" (33rd Initial Petition). Therefore, "the regime provided for in Article 90, Article 10, of the Corporate Income Tax Code was not, ipso jure, susceptible of substantiating the correction of the tax losses declared by the CLAIMANT in its Corporate Income Tax Declaration Model 22 of the 2011 tax year" (34th Initial Petition);

It further adds that "the fact that it did not submit its Corporate Income Tax Declaration Model 22 [pertaining to the 2011 tax year] within the respective legal deadline does not prejudice the demonstrated inapplicability, in the present case, of Article 10 of Article 90 of the Corporate Income Tax Code" (36th Initial Petition);

Nevertheless, "the tax situation of the CLAIMANT relating to the Corporate Income Tax of the 2011 tax year was subsequently revised by the Tax Authority after the submission and processing of its Corporate Income Tax Declaration Model 22 relating to the 2011 tax year (…)" (41st Initial Petition), standing out "from the contested acts that the Tax Authority assumed all values declared by the CLAIMANT in its Corporate Income Tax Declaration Model 22 of the 2011 tax year - particularly, the value of taxable profit declared in field 778 of table 7 (…), in the amount of € 1,814,918.67 (…)" (42nd Initial Petition), "...questioning only the value declared by the CLAIMANT as deductible tax losses, which was reduced to € 1,204,976.64 (…)" (43rd Initial Petition), emphasizing that "the correction of the tax losses declared by the CLAIMANT was carried out under Article 10 of Article 90 of the Corporate Income Tax Code, that is to say, (…) based on a regime specially provided for cases in which the subjects of Corporate Income Tax have not submitted their respective Corporate Income Tax Declaration Model 22" (44th Initial Petition).

Now the "use of this legal regime to question only one of the values declared by the respective subject of Corporate Income Tax - the Tax Authority accepting, without questioning, the remaining values declared, namely that relating to the respective taxable profit - translates an instrumentalization of the regime contained in Article 10 of Article 90 of the Corporate Income Tax Code (…)" (45th Initial Petition), conduct which is "manifestly violative of the principles of legality, equality, proportionality, justice, impartiality and expediency enshrined in Article 55 of the General Tax Law, which prevent the Tax Authority from choosing the regime to apply according to its greater or lesser convenience" (47th Initial Petition).

"Moreover (…) the regime provided for in Article 10 of Article 90 of the Corporate Income Tax Code, even if it were applicable in the specific case - which is not conceded - would not, in itself, be apt or suited to correct the deductible tax losses declared by the CLAIMANT in its Corporate Income Tax Declaration Model 22" (48th Initial Petition), since that provision "establishes a comprehensible limitation of the deductions to be effected by the Tax Authority to the Corporate Income Tax collected ascertained under paragraphs (b) and (c) of Article 1 of Article 90 of the Corporate Income Tax Code, allowing the Tax Authority, in these cases of failure to submit declarations, to limit itself to the deductions of which it is aware based on the elements at its disposal" (49th Initial Petition).

However, "the deductions covered by the aforementioned legal rule are only those «which may be effected in accordance with Articles 2 to 4» of Article 90 of the Corporate Income Tax Code, that is to say, the deductions to the collected Corporate Income Tax substantiated in tax credits for international double taxation, in tax benefits, in special payments on account made by the subject of Corporate Income Tax or in withholdings suffered by the same and which have the nature of tax paid on account (cf. the list contained in Article 2 of the aforementioned rule)" (50th Initial Petition).

However, "not only do tax losses not appear in the list of deductions to the collected Corporate Income Tax set out in Articles 2 to 4 of Article 90 of the Corporate Income Tax Code, but also that they could never appear therein, for the simple reason that they do not constitute deductions to the collected Corporate Income Tax, but rather deductions to the taxable profit of the subjects of Corporate Income Tax" (51st Initial Petition). "When the ascertainment of taxable profit occurs on the part of a subject of Corporate Income Tax, it is conferred upon it the right to deduct from the said profit, within the limits of the law, the reportable tax losses from prior years cf. Articles 15, Article 1, paragraph (a), and 52 of the Corporate Income Tax Code)" (52nd Initial Petition).

"If the deductible tax losses do not consume the entirety of the taxable profit of the tax year, then the taxable matter subject to Corporate Income Tax shall be ascertained" (53rd Initial Petition), with the said taxable matter, if it exists, being "subject to the general rate of Corporate Income Tax, ascertaining, accordingly, the respective tax collected" (54th Initial Petition), and "only at this last moment (…) of the realization of the deductions to the collected enunciated in Article 2 of Article 90 of the Corporate Income Tax Code - that the limitation enshrined in Article 10 of Article 90 of the Corporate Income Tax Code intervenes" (55th Initial Petition). Whereby, "not confusing the phase of realization of deductions to the collected with the phase, located in a prior logical-systematic moment, of ascertainment of taxable matter through deduction of any tax losses to the taxable profit of the tax year, it allows one to conclude (…) that Article 10 of Article 90 of the Corporate Income Tax Code does not enable the Tax Authority to correct the deductible tax losses of subjects of Corporate Income Tax" (56th Initial Petition).

On the other hand, "Article 10 of Article 90 of the Corporate Income Tax Code establishes a regime applicable only in cases in which the subjects of Corporate Income Tax have not submitted their respective Corporate Income Tax Declaration Models 22, finding the Tax Authority in the contingency of assessing Corporate Income Tax officially due by reference to fictitious taxable matter or ascertained based on available elements (cf. paragraphs (b) and (c) of Article 1 of Article 90 of the Corporate Income Tax Code)" (57th Initial Petition), cases in which the "ascertainment of taxable matter (…) is based on indirect methods (…) [and] the reportable tax losses, if there are any, become automatically non-deductible by force of Article 52, Article 3, of the Corporate Income Tax Code" (58th Initial Petition), reason for which "it is incumbent to conclude that [Article 10 of Article 90 CIRC] could never confer upon the Tax Authority (…) the competence to limit the deductibility of deductible tax losses, insofar as, in the hypothesis that such rule were applicable, the respective tax losses would be, already, globally non-deductible by express sanction of Article 52, Article 3, of the Corporate Income Tax Code" (59th Initial Petition).

Additionally, the Claimant alleges that the AT did not comply with the duty of statement of reasons provided for in Article 268, Article 3 of the Constitution and Article 1 of Article 77 of the General Tax Law, not referring "expressly, clearly, sufficiently and congruently, to the facts and law reasons determinative of its performance and its concrete content" (75th Initial Petition), citing various decisions of superior courts on the matter (63rd to 67th and 76th to 77th of the Initial Petition).

It considers that "from the statement of reasons underlying the identified correction it is not possible to withdraw, beyond the fact that the value declared by the CLAIMANT does not correspond to the elements contained in the Tax Authority's database, any conclusion regarding the reasons which led the Tax Authority to quantify the deductible tax losses of the CLAIMANT in the stated value of € 1,204,976.64 (…)" (72nd Initial Petition), and that "from the transcribed excerpts giving reasons are withdrawn (…) the following - and only judging premises:

(i) that the deductible tax losses declared by the CLAIMANT in its Corporate Income Tax Declaration Model 22 relating to the 2011 tax year, in the amount of € 1,814,918.67, do not correspond to the elements contained in the Tax Authority's database;

(ii) that the Tax Authority corrected the indicated deductible tax losses to the value of € 1,204,976.64; and, finally,

(iii) that the correction in question was carried out under Article 90, Article 10, of the Corporate Income Tax Code",

…emphasizing that "nothing was clarified regarding the concrete reasons justifying the disregard of the value declared by the CLAIMANT (reasons that motivated the act and why of the decision sense)" (73rd Initial Petition), "or, as well as, regarding the criteria determinative of the ascertainment of the value of the deductible tax losses concretely fixed by the said corrective act (the cognitive and evaluative itinerary of the act, through which the taxpayer may be informed of the factual and legal reasons that are at its genesis, so as to allow it to choose, in an informed manner, to accept, or not the act)" (74th Initial Petition).

Another formal defect that it identifies, with "omission of essential legal formality" (82nd Initial Petition), was the omission of granting to the Claimant the exercise of the right of prior hearing, cf. paragraph (a) of Article 1 of Article 60 of the General Tax Law (79th to 82nd Initial Petition), making impossible the "faculty of [the Claimant] discussing the premises underlying the correction to be carried out and, if such is the case, providing the additional elements considered convenient for the clarification of its tax situation (…)" (79th Initial Petition).

Finally, "notwithstanding the inapplicability (…) of Article 10 of Article 90 of the Corporate Income Tax Code, (…) the Tax Authority was not prevented from being legally enabled to proceed with the confirmation of the elements declared by the CLAIMANT in its Corporate Income Tax Declaration Model 22 of the 2011 tax year, and, in case it deemed it necessary, to promote its correction" (84th Initial Petition), but to this end the recourse to the tax inspection procedure provided for in the RCPITA was imperative.

"With effect, the confirmation of the values declared in the respective Corporate Income Tax Declaration Models 22 constitutes one of the actions of the tax administration expressly integrated in the tax inspection procedure, as is apparent from Article 2, Article 2, paragraph (a) of the Supplementary Regime of Tax and Customs Inspection Procedure ("RCPITA"), where it is precisely provided for the «confirmation of elements declared by taxpayers and other tax-bound parties»" (85th Initial Petition), enabling the AT with all the prerogatives "… conferred by Article 63 of the General Tax Law and materialized within the framework of the said RCPITA (cf., in particular, Articles 28 and following of RCPITA) to inspect and validate the elements declared by the CLAIMANT in its Corporate Income Tax Declaration Model 22 relating to the 2011 tax year,..." (86th Initial Petition), "...being simultaneously obligated to safeguard the various taxpayer guarantees prescribed by the same legal regime (…)" (87th Initial Petition).

In summary, in understanding that it should confirm the values declared for the 2011 tax year, the AT was subject to the power-duty of resorting to that procedure (88th to 98th Initial Petition), and having not done so, it violated the principle of legality, of omission of essential legal formality and of lack of statement of reasons (99th Initial Petition).

As to compensatory interest, the assessment act was not "accompanied by any statement of reasons demonstrating the verification of the premises, of fact and of law, upon which its exigibility depends" (102nd Initial Petition), the AT not having, as it was obligated, demonstrated and proved "such constitutive facts of the right to assessment of compensatory interest (namely, the culpability of the taxpayer in any delay or tardiness of the assessment of the tax" (107th Initial Petition), particularly culpability, invoking the law (Article 1 of Article 35 of the General Tax Law) and citing various jurisprudence on the matter (105th and 108th to 110th Initial Petition), emphasizing that "the assessment of compensatory interest is not an immediate and automatic consequence (…) of any additional assessment of tax, being able only to correspond, instead, to the final result of the entire cognitive and evaluative process where the nexus of causality is established (…) and a judgment of censure is formulated regarding the taxpayer's action" (112th Initial Petition).

Finally, also as to compensatory interest, just as occurred with respect to Corporate Income Tax, the Claimant was not notified to exercise its right of prior hearing, which constitutes "omission of the essential legal formality provided for in Article 60, Article 1, paragraph (a), of the General Tax Law" (116th Initial Petition).

  1. The AT filed a Response, accompanied by the Administrative Record, alleging, in summary:

In essence the question to be decided turns on the legitimacy of the correction of the tax loss promoted by the AT in the income declaration model 22 relating to the year 2011, filed by the Claimant on 27/10/2015, which directs us to the 2010 tax year (6th and 7th Response).

As to the year 2010, the Claimant not only did not submit the respective income declaration model 22 within the legally prescribed deadline for this purpose, but did not do so after notification to regularize this omission, reason for which on 30/11/2011 the official assessment No. 2011… was issued, which was based on taxable matter of € 6,790.00, corresponding to the annual value of the guaranteed minimum monthly wage (8th Response).

"This assessment complies with Articles 1 and 2 of Article 59 of the Code of Tax Procedure when these establish that 'the assessment procedure commences with the statements of taxpayers or, in the absence or defect of these, based on all elements at the disposal or which the competent entity may obtain', and that 'the ascertainment of taxable matter shall be carried out based on the statements of taxpayers, provided that they present them in the terms provided for by law and provide to the tax administration the elements indispensable for the verification of their tax situation'" (9th Response).

"Constituting therefore the issuance of official assessments an exception regime to the consecration of the principle of the truth of what is declared (Article 75 of the General Tax Law) which is based on a relationship of trust and close cooperation between the AT and taxpayers aimed at enabling the correct ascertainment of taxable matter" (10th Response).

"It is of great interest to taxpayers that comply scrupulously with their declaration obligations and with their accounting obligations, respecting deadlines, and in which the data reproduced are provided truthfully and in good faith, for upon compliance with these obligations will depend the direct or indirect taxation of their income" (11th Response). "And it was precisely what did not occur in the tax year in question. The taxpayer did not deliver the Declaration Model 22, on time, reason for which the AT found itself obligated to assess the tax officially" (12th Response).

Without prejudice to the fact that, "when an official assessment is effected in the Corporate Income Tax matter, under Article 90, Article 1, paragraph (b) of the CIRC, this is susceptible of being corrected, which occurs whenever taxpayers subsequently present the declaration and other values different from those considered in the official assessments can be ascertained, as occurred (…) in the case in question" (13th Response).

"Nevertheless, the discussion of the values declared in the income declarations presented at a later moment, configuring a value of tax to be paid smaller or a Tax Loss greater, as is well known, can only be made within the scope of a Judicial Challenge or a Gracious Claim, within the deadlines provided for in Article 3 of Article 59 of the Code of Tax Procedure in conjunction with Article 122 of the CIRC" (14th Response).

However, "the Claimant only presented the Substitute Declaration Model 22 on 05.03.2014, through which it declared a Tax Loss of € 3,211,768.46 and did not lodge any contentious matter, reason for which the official assessment became consolidated in its legal sphere" (15th Response), "reason for which the Claimant could not have deducted, in the 2011 tax year and up to the concurrence of the taxable profit ascertained, the amount of Tax Losses declared which appear in a declaration relating to the prior tax year (…)" (16th of the Response).

Given that the deduction of tax losses "…is not arbitrary nor can it remain at the availability of the taxpayer, but is fixed imperatively…", taxpayers cannot "…choose the tax year in which they deduct the losses" (21st of the Response), whereby "…it is entrusted to the AT a power/duty of inspection and correction to the losses declared and deductible by taxpayers" (23rd of the Response), as "results from the letter of Article 3 of Article 52 of the CIRC, which provides 'when corrections are made to the tax losses declared by the taxpayer, the deductions effected shall be altered accordingly, but no annulment or assessment, even if additional, of Corporate Income Tax shall be effected, if more than six years have elapsed with respect to the tax year to which the taxable profit relates'" (underlining by the Respondent) (24th of the Response), "having been precisely, within this scope, that the AT (…) ascertained an incorrect use of the tax losses by the Claimant and corrected it in accordance with the balance of losses at its disposal" (25th of the Response).

Considering that "the tax losses generated in tax years prior to 2011 can only be reported for a period of 6 years, which means that, in this case, the Tax Losses generated in tax years prior to 2005 could not be reported for the 2011 tax year as they were expired" (26th Response), "in these terms, the Claimant declared in the 2005 tax year a Tax Loss of € 81,468.34, in the 2006 tax year a Tax Loss of € 175,493.75, in the 2007 tax year did not declare any Tax Loss because it did not deliver the respective Declaration Model 22, in the year 2008 declared a Tax Loss of € 531,231.07, in the year 2009 declared a Tax Loss of € 416,763.48, in the 2010 tax year did not declare any Tax Loss as it did not proceed with the delivery of the Declaration Model 22, which totals the value of € 1,204,976.64, corrected by the AT" (27th of the Response).

Whereby, "adding the losses declared by it, it is verified that they total the value of € 1,204,976.64, reason for which the Claimant could not have deducted, for not disposing of the balance, the exact amount of € 1,814,918.67 up to the concurrence of the Taxable Profit ascertained in the same value" (28th of the Response).

As to the duty of statement of reasons, the Respondent cites the Decision of the Superior Administrative Court of 10/02/2010, which addressed Proceeding No. 01122/09, according to which "the statement of reasons of the administrative act is a relative concept that varies according to the type of act and the circumstances of the specific case, but is only sufficient when it allows a normal recipient to perceive the cognitive and evaluative itinerary followed by the author of the act to render the decision, that is, when that person may know the reasons why the author of the act decided as it did and not differently, so as to be able to trigger the administrative or contentious mechanisms of impugnation", maintaining that in "cases of discretionary powers, in which the cognitive and evaluative journey of the author of the act may prove more ambiguous imply greater acuity in this duty of statement of reasons, already this requirement being lesser when one acts within the scope of bound powers" (38th of the Response), considering that in the case no "diminution or restriction of any guarantee of the Claimant" was affected, given the statement of reasons for the correction made by the AT: "Pursuant to Article 10 of Article 90 of the Corporate Income Tax Code, the AT proceeded to the control of the tax losses indicated in the periodic income declaration model 22. The value of the tax loss deducted in the terms of Article 52 of the Corporate Income Tax Code, evidenced in the declaration model 22 of the 2011 tax year, does not correspond to the elements contained in the Tax and Customs Authority's database and will be subject to correction in the respective assessment, as evidenced in the attached table. (…) Tax Loss declared: € 1,814,918.67 € - tax loss corrected: € 1,204,976.64" (42nd of the Response).

As to the alleged omission of the right of prior hearing, the AT states that "there is a very restricted number of cases in which (…) these are weighed, and their waiver is determined and which are enshrined in Circular of AT 13/99, of 08.07.1999" (47th of the Response), where it is stated that: "the hearing of the interested parties may be waived, without prejudice to the necessary weighing of the specific case and adequate statement of reasons, namely when: (…) b) The tax administration acts exclusively within the scope of bound powers", which occurs in cases in which prior hearing does not have the slightest probability of influencing the decision taken" (48th of the Response).

Further citing the Decision of the Administrative Court of Appeals of 09.02.2006 in Proceeding 00928/04, which in turn refers to the Decision of the Superior Administrative Court of 17/12/97, "the right of the interested party in the participation of the formation of the act of which it is a recipient will only be truly violated if through this participation there is the possibility, however slight, of the interested party coming to exercise influence, whether through the clarifications provided, whether by the calling of attention to certain aspects of fact and of law, in the decision to be rendered, at the end of the instruction" (49th of the Response).

Now in the case, "the AT did not call into question the origin of the tax losses deducted by the Claimant but rather their reporting by non-existence of balance, non-existence which resulted from the disregard of the Taxable Profit ascertained in the Declaration Model 22 relating to the 2010 tax year delivered late, a situation which the Claimant had full knowledge, as well as of the legal consequences arising therefrom which it cannot allege not to know" (50th of the Response), from which the Respondent concludes that it was exempt from notifying the Claimant to exercise the right of prior hearing, further invoking the reconciliation of the "right of hearing of taxpayers with the principles of pursuit of the public interest, of proportionality and of expediency enunciated in Article 55 of the General Tax Law" (51st of the Response).

With respect to compensatory interest, "considering that the Declaration Model 22 relating to 2011 was corrected on 17.12.2015 from which resulted taxable matter to be taxed in the amount of € 609,942.03, to be contrasted with the official assessment previously promoted, one cannot withdraw that there is no tardiness of compliance with the obligation of assessment of tax by the Claimant" (53rd Response), in the terms of Article 35 of the General Tax Law and Article 102 of the CIRC, subjectively imputable to the taxpayer by way of negligence, "insofar as the correction of tax was founded on the letter of Article 52 of the CIRC, particularly in its Article 1 and ignorance of the law does not justify its non-compliance (Article 6 of the Civil Code), and therefore cannot favor the Claimant" (56th of the Response).

Additionally, as to the statement of reasons for the decision of compensatory interest "the note of demonstration 'detail of interest assessment' which … was notified personally together with the notification of the additional assessment and of default interest, states the period of taxation, which rate was applied and the amount to which it applies, reason for which in harmony with the jurisprudence of the Superior Administrative Court, we give the assessment of compensatory interest as reasoned" (59th of the Response), in the terms of Article 9 of Article 35 of the General Tax Law.

  1. Recall that in the Response, in summary, the AT argued that the Claimant did not present within the deadline the declaration model 22 of Corporate Income Tax relating to the 2010 tax year, which was only submitted on 5/3/2014, as per document attached to the record. By virtue of that omission, which was not remedied even after notification to regularize the situation in default, on 30/11/2011 the official assessment No. 2011… was issued, which was based on taxable matter of € 6,790.00.

According to the AT, having not the Claimant lodged any contentious matter against this assessment, the same is considered consolidated in its legal sphere. Therefore, the Claimant could not have deducted in the 2011 tax year and up to the concurrence of the taxable profit ascertained, "the amount of Tax Losses declared which appear in a declaration relating to the prior tax year and which for the reasons pointed out remained in the situation of «not assessable»" (16th of the Response). Furthermore the AT adds, in Article 26, that "(...) the tax losses generated in tax years prior to 2011 can only be reported for a period of 6 years, which means that, in this case, the Tax Losses generated in tax years prior to 2005 could not be reported for the 2011 tax year as they were expired".

  1. Finding itself in the stage of appreciation of the merit of the present case, the Tribunal became aware that the AT, without having duly separated the allegation of peremptory exception, invoked the expiration as to the reporting of tax losses generated in tax years prior to 2011. Insofar as the Tribunal's pronouncement on this matter can only take place after exercise of the right of reply by the Claimant, a deadline of 10 days was granted to it for exercise of such faculty, if it wished, by arbitral order of 26/5/2016.

In exercise of the right of reply, the Claimant came to argue that the grounds alleged by the AT in the Response do not appear in the previously notified acts, constituting Articles 3 to 34 innovative matter and therefore "reasoning a posteriori". In the Claimant's understanding, the AT's considerations are not, for such reason, susceptible of configuring a peremptory exception.

  1. There being no grounds for production of constitutive proof, saving the eventuality of the parties opting for oral arguments, the Tribunal waived the realization of the meeting provided for in Article 18 of the RJAT, under the principles of the autonomy of the Tribunal in the conduct of the case, and in order to promote expediency, simplification and informality thereof, as per Articles 19, Article 2 and 29, Article 2 of the RJAT. It further designated the day 12/11/2016 as the deadline for pronouncement of the arbitral decision, the Claimant being required, up to that date, to pay the subsequent arbitration fee.

  2. The parties presented written arguments within the legal deadline, advocating, in essence, for the positions initially defended.

II. Procedural Cleansing

  1. The parties have legal personality and capacity, as well as being beneficiaries of procedural standing (Articles 4 and 10, Article 2, of the RJAT and Article 1 of Ordinance No. 112-A/2011, of 22 March).

  2. The AT proceeded with the appointment of its representatives in the case and the Claimant attached a power of attorney, the Parties thus being duly represented.

  3. In accordance with the provisions of Articles 2, Article 1, paragraph (a), 5, 6, Article 1 and 11, Article 1, of the RJAT (as amended by Article 228 of Law No. 66-B/2012, of 31 December), the Arbitral Tribunal is competent and is properly constituted.

  4. The case does not suffer from any nullities.

  5. There being no questions that prevent the appreciation of the merit of the case, the conditions are met for a final decision to be rendered.

III. Factual Matter

  1. With relevance to the appreciation and decision of the questions raised as to the merit, the following facts are taken as established and proven:

  • As a commercial company with registered office in Portuguese territory, the Claimant is a subject of Corporate Income Tax, in the terms of paragraph (a) of Article 1 of Article 2 of the CIRC, being registered as of 1/1/2004 under the general taxation regime for purposes of Corporate Income Tax;

  • With respect to the 2005 tax year the Claimant declared a tax loss of € 81,468.34;

  • With respect to the 2006 tax year the Claimant declared a tax loss of € 175,493.75;

  • With respect to the 2007 tax year the Claimant did not submit the income declaration model 22 within the legally prescribed deadline;

  • With respect to the 2008 tax year the Claimant declared a tax loss of € 531,231.07;

  • With respect to the 2009 tax year the Claimant declared a tax loss of € 416,763.48;

  • With respect to the 2010 tax year the Claimant did not submit the income declaration model 22 within the legally prescribed deadline;

  • Also regarding the 2010 tax year, after notifying the taxpayer to regularize the omission of submission of the income declaration, on 30/11/2011 the AT issued the official assessment No. 2011…, which was based on taxable matter of € 6,790.00;

  • With respect to the 2011 tax year the Claimant did not submit the income declaration model 22 within the legally prescribed deadline;

  • Also regarding the 2011 tax year, after notifying the taxpayer to regularize the omission of submission of the income declaration, on 20/11/2012 the AT issued the official assessment No. 2012…, which was based on taxable matter of € 6,790.00;

  • On 5/3/2014 the Claimant submitted the income declaration model 22 relating to the 2010 tax year, where there appeared a tax loss of € 3,211,768.46 (field 301) and deductible tax losses of € 1,248,518.45 (field 303);

  • On 27/10/2015 the Claimant submitted the income declaration model 22 relating to the 2011 tax year, where there appeared a taxable profit of € 1,814,918.67 (field 778), deductible tax losses of € 4,166,201.44 (field 303), deducted tax losses of € 1,814,918.67 (field 309), taxable matter of € 0.00 (field 311), total tax collected of € 0.00 (field 378), and total to be paid of € 0.00 (field 367);

  • On 27/10/2015 the AT issued a document, notified to the Claimant on 22/12/2015, with the subject "Correction to the value of deductible tax losses – Period of 2011", with the following content:

"Pursuant to Article 10 of Article 90 of the Corporate Income Tax Code, the Tax and Customs Authority proceeded to the control of the tax losses indicated in the periodic income declaration model 22.

The value of the tax loss deducted in the terms of Article 52 of the Corporate Income Tax Code, evidenced in the declaration model 22 of the 2011 period, does not correspond to the elements contained in the Tax and Customs Authority's database and will be subject to correction in the respective assessment, as evidenced in the attached table.

Regarding this correction you may present a gracious claim or judicial challenge in the terms and deadlines provided for in Article 137 of the Corporate Income Tax Code, when the assessment is notified to you.

If you wish, however, to voluntarily regularize the situation, you may do so by submitting a substitute declaration, in the terms of Article 122 of the Corporate Income Tax Code, within 15 days counted from this notification.

| Tax loss declared | Tax loss corrected |
| € 1,814,918.67 | € 1,204,976.64 |

With best regards,

The Director of Services (…)"

  • On 17/12/2015 the AT issued Assessment No. 2015…, notified to the Claimant on 22/12/2015, for a total of € 203,969.32, including Corporate Income Tax (€ 150,923.00), municipal surcharge (€ 27,223.78), compensatory interest (€ 24,274.53) and default interest (€ 1,548.01);

  • In the note of demonstration "detail of interest assessment" which was notified personally to the Claimant together with the notification of the additional assessment and the default interest assessment, appear the period of taxation, the rate applied and the amount to which it applies.

  1. Statement of reasons for the factual matter:

The proven factuality had as its basis the critical appreciation of the position assumed by each of the parties, as well as the critical analysis of the documents attached to the case, whose authenticity and veracity were not impugned by any of the parties.

  1. There are no other facts, with relevance for appreciation of the merit of the case, that have not been proven.

IV. Legal Matter

IV.1. Appreciation of the Peremptory Exception of Expiration

As we have seen, in Article 26 of the response the AT invoked that "(...) the tax losses generated in tax years prior to 2011 can only be reported for a period of 6 years, which means that, in this case, the Tax Losses generated in tax years prior to 2005 could not be reported for the 2011 tax year as they were expired".

Although without duly separating the allegation of peremptory exception, the AT invoked the expiration as to the reporting of tax losses prior to 2011. Having been granted a deadline to the Claimant for exercise of the right of reply.

It behooves us to appreciate.

From more careful analysis of the case and in particular of the response of the AT, it is verified that in strictness, the reference made by the AT to expiration (17th to 21st and in particular at 26th at the end of the Response), which led the Tribunal to identify the exception, has no relevance for the case at bar.

With effect, immediately after the AT explains referring to the "nuclear question of the case" that "the Claimant could only deduct from the taxable profit of the year 2011 the Tax Losses declared by it from 2005 (inclusive), and this is the question, in the case, the AT did not correct any losses relating to prior years, it limited itself to disregarding in the 2011 tax year the tax loss declared in the year 2010 for the reasons already set out" (29th of the Response).

Being at issue the disregard in the 2011 tax year of the tax loss declared for the year 2010, no question of expiration arises. In truth, tax losses declared late and on which an assessment was meanwhile issued based on indirect methods, become automatically non-deductible, by force and in the terms of Article 2 of Article 52 of the CIRC (in the wording effective in 2010), as indeed the Claimant reveals to know (57th and 58th of the Initial Petition).

In the end, the reference made by the AT to expiration is contextually made as delimitation of the legal framework imperatively applicable to tax losses, as legal basis and with the useful meaning of fixing the value of tax-deductible losses in the case. A value that is decomposed in accordance with the years in which the losses were generated (27th Response), the AT emphasizing the "disregard" of the tax losses generated in 2010 (29th Response), qualifying this as the "nuclear question in the case". From there, the AT justifies the assessment as resulting from the correction of the difference (by excess) between the losses deducted by the taxpayer, and those that were actually deductible (25th, 28th, 30th and 33rd of the Response), since thereby it ceased to tax the tax due.

In sum, the decision on the officially raised expiration is thus forfeited.

The Claimant alleges that we are before reasoning a posteriori, for the same does not appear in the previously notified assessment act. This is what is then analyzed.

IV.2. Duty of Statement of Reasons

A different question is whether the statement of reasons of the additional assessment act complies or not with the requirements of the duty of statement of reasons.

The conclusion invoked by the Claimant, that we are before "reasoning a posteriori", and the consequences which it claims therefrom, of inadmissibility of the same for purposes of appreciation of the validity of the acts contested in the present request for arbitral pronouncement, necessarily implies to appreciate, first of all, whether or not the duty of (contemporaneous) statement of reasons for the assessment act was, or was not, complied with. For only "a posteriori" reasoning is that which has not already complied with the duty of statement of reasons of the very contested act.

Let us see.

It is indisputable that the AT has the duty to state reasons for the acts that affect the rights or legitimate interests of taxpayers, in accordance with the principle embodied in Article 268, Article 3 of the Constitution and embraced in Articles 152 of the Code of Administrative Procedure and 77 of the General Tax Law.

In accordance with the Constitution "administrative acts are subject to notification to the interested parties, in the form provided for by law, and require express and accessible statement of reasons when they affect rights or legally protected interests", according to the Code of Administrative Procedure (paragraph (a) of Article 1 of Article 152) "…administrative acts must be reasoned that, wholly or partially… impose or aggravate duties, charges, burdens, subjections or sanctions", and according to the General Tax Law "the decision of the procedure is always reasoned by means of a brief exposition of the reasons of fact and of law that motivated it, being possible for the reasoning to consist in mere declaration of agreement with the grounds of prior opinions, information or proposals, including those that integrate the statement of the tax inspection".

Resorting to recent jurisprudence, we have the Decision of the Superior Administrative Court of 10/9/2014 (proceedings 01226/13, rapporteur: Dulce Neto), according to which "the doctrine and jurisprudence have been exhaustively repeating that reasoning must be express, through a brief exposition of the factual and legal grounds of the decision; clear, allowing that through its terms the facts and the law be grasped with the basis on which one decides; sufficient, making it possible for the taxpayer to have concrete knowledge of the motivation of the act; and congruent, so that the decision constitutes the logical and necessary conclusion of the motives invoked as its justification" (underlining ours). In this context, and according to the Decision of the Superior Administrative Court of 9/9/2015 (proceedings 01173/14; rapporteur: Casimiro Gonçalves) "the act is only reasoned if a normally diligent or reasonable recipient – a normal person – placed in the concrete situation expressed by the reasoned declaration and before the concrete administrative act (which will determine, according to its diverse nature or type, a greater or lesser requirement of the density of the elements of reasoning) is placed in a position to know the functional (not psychological) itinerary cognitive and evaluative of the author of the act, it being therefore essential that the contextual discourse make known to it the entire path of the apprehension and evaluation of the factual and legal premises that support the decision or the reasons why one decided in a given sense and not in any other. It aims to «specifically clarify the reasons that determined the decision taken and not to find the substantive basis that perhaps legitimizes it, since the formal duty of reasoning is complied with 'by the presentation of possible premises or of coherent and credible motives, while substantive reasoning requires the existence of real premises and of correct motives capable of supporting a legitimate decision as to the substance'. The reasoned discourse must be capable of clarifying the determinative reasons of the act, for which it must be a clear and rational discourse; but, insofar as its lack or insufficiency entails a formal defect, it is not in issue, to evaluate the formal correctness of the act, the substantive worth of the adduced grounds, but only their existence, sufficiency and coherence, in terms of making known the reasons for the decision» (Cf. Vieira de Andrade – ob. cit. page 239, in the citation of the decision of the Superior Administrative Court of 11/12/2002, proceedings 01486/02)" (underlining ours).

It is relevant, as is seen by the underlined passages, the specificity of the concrete circumstances of the case, and the condition of the recipient of the reasoning, as to the fact knowledge which it already possesses about the situation in which it finds itself.

In the case at bar, to substantiate the correction which was at the basis of the assessment now impugned the AT said the following, in notification with the subject "Correction to the value of deductible tax losses – Period of 2011:

Pursuant to Article 10 of Article 90 of the Corporate Income Tax Code, the Tax and Customs Authority proceeded to the control of the tax losses indicated in the periodic income declaration model 22.

The value of the tax loss deducted in the terms of Article 52 of the Corporate Income Tax Code, evidenced in the declaration model 22 of the 2011 period, does not correspond to the elements contained in the Tax and Customs Authority's database and will be subject to correction in the respective assessment, as evidenced in the attached table (…) Tax Loss declared € 1,814,918.67 € | Tax Loss corrected € 1,204,976.64 € (…)".

Appreciating the requirements to which the reasoning must be subject on the one hand, the concrete form adopted by the AT to substantiate the assessment, and further the circumstances that surrounded the tax act, designedly the late submissions of the income declaration models 22 of 2010 and 2011, it appears to us that the same allows its recipient to achieve the desideratum which is behind the legal requirement for the reasoning of tax acts and which is the apprehension of the reasons of fact and of law that justified the correction of the declared elements and the motivation of the additional assessment, in line with the appreciation made in the Decision of the Administrative Court of Appeals of 15/2/2012 (proceedings 00881/08.0BEBRG, rapporteur: Paula Fernanda Cadilhe Ribeiro), versing on the challenge of an assessment with identical contours (equal as to the reasoning, but corresponding to the prior Article 83 CIRC, which preceded Article 90). As is said in that Decision, which is subscribed in the part subsequently transcribed, "the Challenger, presupposed normal recipient of the act, found itself in a position to understand that the correction of the taxable profit was determined by the non-acceptance of the deduction of the tax loss declared by it in the declaration model 22 and that, by way of that correction, which resulted from the total disregard of the deducted tax loss, was effected the assessment here challenged… The reasoning has as its objective to make known to its recipient the reasons of fact and of law that determined the act so that with it one may conform or then react against it judicially. Now, having regard to this instrumental function of the reasoning, the act should be considered reasoned when it made known to its recipient the sufficient elements which allowed it in time to react against it, as was the case in the case at hand …It is that the reasoning is a relative concept, needing to be measured case by case, having regard to the circumstances that led to the practice of the act and the knowledge which its recipient has of them that allow it to perceive or apprehend the reasons that determined it".

In the case, this perception or apprehension was particularly expectable having regard to the late compliance with the declaration obligations by the taxpayer, and corresponding official assessments of tax by indirect methods, which evidently could not fail to be aware of (so much so that the same are not controversial in the present case), and the corresponding implications regarding the automatic non-deductibility of tax losses, in the terms of Article 2 of Article 52 CIRC (cf. wording effective in 2010). This provision which the AT did not fail to cite in the reasoning of the tax correction of the losses, albeit in generic terms, referring to the "tax loss deducted in the terms of Article 52 of the Corporate Income Tax Code".

And it should be added that, if there were any doubts on the part of the taxpayer, the same should not be attributable to a deficient reasoning of the act, but rather to the deficient identification of the law applicable to the case, on the part of the Claimant (as will be demonstrated with respect to the alleged inapplicability of the regime of Article 10 of Article 90 CIRC), which, in the terms of Article 6 of the Civil Code does not legitimize non-compliance with the law.

In the Response to the Initial Petition, the AT explicitly set out the relevant legal regime applicable relating to reportable tax losses (in particular as regards the non-deductibility of losses declared late, on which there has been an official assessment by indirect methods), to which subsuming the concrete situation of the taxpayer, it concludes by demonstrating the excess of losses deducted by it vis-à-vis the value of tax-deductible losses, thereby justifying the corrective assessment issued.

Finally, attending to the factual and legal character of the case, the regime contained in Article 163, Article 5, paragraph (a) final part, and (c) of the Code of Administrative Procedure would always apply, from which it follows that no annulment effect is produced when: i) "(…) the appreciation of the specific case allows identifying only one solution as legally admissible"; or ii) "it is demonstrated, without margin for doubts, that, even absent the defect the act would have been practiced with the same content". In the case at bar the act would always be upheld based on the verification of any of these circumstances.

It is concluded, thus, that the defect of lack of statement of reasons of the tax act is without merit and, consequently, that the argument of improper a posteriori reasoning is without merit.

IV.3. Appreciation of the Other Grounds of Illegality of the Additional Corporate Income Tax Assessment

What is now appreciated concerns the other grounds underlying the Claimant's request for declaration of illegality of the additional Corporate Income Tax assessment No. 2015 …(which includes the assessment of the consequent municipal surcharge, default interest and compensatory interest).

Such grounds are the following:

As to Corporate Income Tax:

1.1 Inapplicability of the regime enshrined in Article 10 of Article 90 of the CIRC to the correction of the values declared by the Claimant in its declaration model 22 of Corporate Income Tax relating to the 2011 tax year;

1.2 Omission of essential legal formality, due to failure to notify the Claimant to exercise its right of prior hearing;

1.3 Power-duty of application of the tax inspection procedure provided for in the RCPITA.

As to compensatory interest:

2.1 Lack of reasoning as to the demonstration of the exigibility of compensatory interest;

2.2 Omission of essential legal formality relating to the right of prior hearing.

IV.3.1. As to Corporate Income Tax

1.1 On the inapplicability of the regime enshrined in Article 10 of Article 90 of the CIRC

The Claimant initiates the exposition on the illegality of the correction carried out by the AT and, consequently, of the tax act of additional Corporate Income Tax assessment which is the subject of the present request for arbitral pronouncement, dedicating itself to sustaining the inapplicability of the regime enshrined in Article 10 of Article 90 of the CIRC to the correction of the values declared by the Claimant in its declaration model 22 relating to the 2011 tax year.

As the Claimant refers, that is the foundational rule of the "Correction to the value of deductible tax losses - Period of 2011", where one can read right in the first paragraph: "Pursuant to Article 10 of Article 90 of the Corporate Income Tax Code, the Tax and Customs Authority proceeded to the control of the tax losses indicated in the periodic income declaration model 22".

After introductorily enunciating the content of Article 10 of Article 90 CIRC (23rd of the Initial Petition), the Claimant develops an extensive expositive development of the inapplicability of the cited provision, relating it to paragraphs (b) and (c) of Article 1 of the same Article 90, also enunciated.

In that exposition the Claimant evidences various problems and contradictions allegedly resulting from the application of that rule, namely for the assessment being substantiated with provisions that presuppose the absence of a declaration, subsequently the tax act coming to correct values of the declaration actually delivered, and for the correction made by the AT affecting the taxable matter, when it could only limit the deductions to the collected, to conclude that the correction made by the AT "rested on manifest error regarding its legal premises".

It happens that the presupposed content of Article 10 of Article 90 CIRC which the Claimant transcribes in Article 23 of the Initial Petition ("To the amount ascertained under paragraphs (b) and (c) of Article 1 only those deductions are made of which the tax administration is aware and which may be effected in accordance with Articles 2 to 4") is that which presently applies, from the renumbering resulting from the beginning of effectiveness of Law No. 2/2014, of 16 January, which republished the CIRC, and not that which applied in 2011, which is what matters to us, while foundational rule which the Claimant calls into question, of the "Correction to the value of deductible tax losses - Period of 2011". That is to say, the Claimant labored departing from a basic misunderstanding, relating to the applicable law. It called into question the applicability of a rule which is not that which actually substantiates the correction of tax losses.

With effect, notwithstanding the tax assessment act being issued in 2015, the same comes to correct the taxation of Corporate Income Tax relating to the 2011 tax year, reason for which it is the law of that year, in effect on 31/12, by virtue of it being a periodic tax, which is relevant in the appreciation of the case. That is to say, it is at issue the wording effective on 31/12/2011 of Article 90 Article 10, and not the current wording.

Analyzing then the law effective in 2011, which actually substantiated the correction of tax losses of 2011, we have that:

i. Article 90 Article 10 CIRC – Procedure and form of assessment:

"The assessment provided for in Article 1 may be corrected, if such be the case, within the deadline to which Article 101 refers, collecting or annulling then the differences ascertained";

ii. Article 90 Article 1 CIRC – Procedure and form of assessment:

"The assessment of Corporate Income Tax is effected in the following terms:

a) When the assessment is to be made by the taxpayer in the declarations referred to in Articles 120 and 122, it is based on the taxable matter which appears therein;

b) In the event of failure to present the declaration referred to in Article 120, the assessment is effected up to 30 November of the following year to that which it relates or, in the case provided for in Article 2 of the said article, up to the end of the 6th month following the end of the deadline for presentation of the declaration mentioned therein and is based on the annual value of the minimum monthly wage or, when greater, the entirety of the taxable matter of the closest prior year that is determined;

c) In the event of failure of assessment in accordance with the foregoing paragraphs, the same is based on the elements at the disposal of the tax administration".

iii. Article 101 CIRC – Expiration of the right to assessment:

"The assessment of Corporate Income Tax, even if additional, may only be effected within the deadlines and in the terms provided for in Articles 45 and 46 of the General Tax Law".

The combined analysis of these provisions, indissociable from each other by virtue of the remissions of Article 90 Article 10 CIRC, applied to the facts sub judice, results in that:

i. In a first moment, the failure to deliver declaration model 22 of 2011 up to 30/5/2012, gave rise to an assessment on 20/11/2012 (the legal limit was 30/11/2012), based on the annual value of the guaranteed minimum monthly wage (cf. paragraph (b) of Article 1 of Article 90 and Article 1 of Article 120 CIRC). Here is at issue the official assessment No. 2012…, which was based on taxable matter of € 6,790.00;

ii. In a second moment, following the submission on 27/10/2015 of the declaration model 22 of 2011, due to the correction of the deducted tax losses to the taxable profit of 2011 (partial purge of losses relating to 2010), with an aggravating effect of the taxation in Corporate Income Tax, there arises a second assessment, corrective of the first, within the deadline to which Article 101 refers (cf. Article 90 Article 10 CIRC). Here is at issue Assessment No. 2015…, notified to the Claimant on 22/12/2015, for a total of € 203,969.32, including Corporate Income Tax (€ 150,923.00), municipal surcharge (€ 27,223.78), compensatory interest (€ 24,274.53) and default interest (€ 1,548.01);

iii. And the limit to which Article 101 CIRC refers is that of the expiration of the right to assessment, that is 4 years cf. Article 45 of the General Tax Law, which in the case was complied with (the corrected year is 2011 and the corrective assessment appears in 2015).

In sum, regarding 2011 there were two assessments of tax. As to the first, the Claimant conformed, and as such the assessment became consolidated in its legal sphere and constituted res judicata. As to the second, the Claimant comes to challenge, beginning by calling into question the applicability of a regime (Article 90 Article 10 CIRC in its current wording) different from that which actually was applied (Article 90 Article 10 CIRC in its wording effective in 2011). Consequently, in the challenge, it confuses the first with the second assessment and identifies problems and contradictions which in truth do not exist.

The Claimant argues (Article 57 of the Initial Petition), on the other hand, that Article 90 Article 10 CIRC is applicable only to taxpayers who have not delivered (ever) the income declaration of the tax year in question. But as is seen in the letter of that provision, in the wording effective in 2011 (corresponding to current Article 12 of Article 90 CIRC), there is made reference to the "differences ascertained" between the assessments, those ascertained in the terms of Article 1 of Article 90 CIRC and the corrective ones, if such be the case, namely those resulting from the later declaration (substitute declaration, in the case of Article 90 Article 1 paragraph (a) or first declaration presented late, in the case of Article 90 Article 1 paragraph (b) CIRC).

Finally, the Claimant presents a last reason (57th to 61st of the Initial Petition) which justifies its understanding of the inadequacy of Article 10 of Article 90 CIRC. It maintains that, in cases in which indirect methods are to apply (particularly those provided for in paragraphs (b) and (c) of Article 1 of Article 90 CIRC), the existing reportable tax losses automatically become non-deductible by force of Article 3 of Article 52 CIRC, not having Article 10 of Article 90 CIRC the competence to limit the deductibility of deductible tax losses, this rule being inapt to substantiate the correction of reportable tax losses. Having the substantiating aptness of the rule been analyzed with respect to the alleged reasoning defect, let us focus on the legitimizing character of the rules mentioned.

There is no doubt that the non-deductibility of tax losses in the situations indicated by the Claimant results from Article 52 CIRC but, in strictness, from Article 2 cf. wording effective in 2010 (because what is at issue is the deductibility of losses generated in that year), and not from Article 3 (as occurs in the current wording), and as such it is justified that reference be made to that provision (Article 52 CIRC) in the tax assessment act, as occurs in the case in judgment. With effect, the introductory reference of the assessment act to Article 10 of Article 90 CIRC did not replace the substantive ground of the correction of the losses, proper to Article 2 of Article 52 CIRC (wording effective in 2010), but rather invoked the provision which legitimized the correction to the assessment made in the terms of Article 1 of Article 90 of the CIRC. Such introductory reference would always be justified, by virtue of the prior official assessment that comes to be corrected, necessarily supplemented with the substantive rule(s) relevant which would substantiate the correction.

In terms in which it is considered without merit the reasons invoked by the Claimant when it considers inapplicable to the case sub judice, by error regarding the legal premises, the regime enshrined in Article 10 of Article 90 of the CIRC.

1.2 On the omission of essential legal formality due to failure to notify to exercise the right of prior hearing

The participation of citizens in the formation of administrative decisions that concern them is a Constitutional requirement, which appears in Article 5 of Article 267 of the Constitution.

Prior hearing, the more relevant expression of the participation of taxpayers in the formation of administrative decisions, assumes in tax legal relations a protective function.

The failure to notify to exercise prior hearing, invoked by the Claimant in the Initial Petition, is not contested by the Respondent, rather confirmed. As we shall see below, more than confirmed, it is justified.

At an infra-constitutional level, Article 60 of the General Tax Law (beyond Article 12 of the Code of Administrative Procedure and Article 45 of the Code of Tax Procedure) enumerates the situations in which prior hearing should take place in the domain of the tax procedure. Article 1 of that article specifies the terms of participation of taxpayers in the formation of decisions that concern them. Subsequently, Articles 2 and 3 refer to the cases in which the hearing is waived. It is here a complete enumeration, which is not exemplary, as results from the terms in which the said rules are shown to be formulated, in a way, we would say, sufficiently concretized.

The content of paragraph (a) of Article 1 of Article 60 of the General Tax Law, relating to the "right of hearing before assessment", serves the purpose of the taxpayer having the opportunity to, before the assessment, state its reasons, aiming at the pursuit of material truth. The right of prior hearing which the taxpayer enjoys impinges upon the subject of a procedure, as it arises after the instruction and before the decision. Thus, with a decision in preparation, the communication made to the interested party to exercise the right of hearing must inform it of the draft decision, its reasoning, the deadline within which the said right may be exercised, and the information relating to the possibility of exercising the said right, by oral or written form.

The communication effected by the AT consists of two parts:

1- The first part, dated 27/10/2015, announces and substantiates the correction to the value of deductible tax losses of the 2011 period. Additionally, it informs the legally prescribed means of reaction, at the disposal of the taxpayer, to be used when the assessment is notified. Finally, it informs of the possibility of voluntary regularization of the situation;

2- The second part, dated 15/12/2015 (issued on 17/12/2015) consists of the assessment proper, with No. 2015…, notified to the Claimant on 22/12/2015, for a total of € 203,969.32, including Corporate Income Tax (€ 150,923.00), municipal surcharge (€ 27,223.78), compensatory interest (€ 24,274.53) and default interest (€ 1,548.01).

Thus, the content of the communications effected, containing its reasoning, does not present itself properly as a draft decision, but rather as a final decision, without the Respondent being granted the opportunity to pronounce itself on the factual and legal matter, taking position, and intervening in an informed manner in the process of formation of the decision.

The AT confesses that prior hearing of the taxpayer was not observed, invoking the following passage from Circular of AT 13/99, of 8/7/1999: "The hearing of the interested parties may be waived, without prejudice to the necessary weighing of the specific case and adequate reasoning, namely when: (…) b) The tax administration acts exclusively within the scope of bound powers".

As is known, the circulated law does not bind but the administration, and does not override the law. What, however, does not mean that it is devoid of utility, by virtue of the doctrine that is contained therein, which may be consistent or compatible with the law.

In principle, the omission of this essential formality of prior hearing implies the voidability of the administrative act, cf. Article 163 of the Code of Administrative Procedure. With effect, the formality in question, being essential, is only degraded to non-essential, not thereby being invalidating of the decision, in the cases in which the prior hearing did not have the slightest probability of influencing the decision taken. The dominant doctrine and jurisprudence have been sustaining this position, invoking the principle of the saving of the act, understanding that when there does not exist the slightest probability of (prior hearing) influencing the decision taken by the AT, the administrative act should not be annulled.

The Claimant points to Decisions of Superior Courts, recent, which maintain that in this case prior hearing is required. Specifically, on the application of the regime enshrined in Article 90 of the CIRC (corresponding to the prior Article 83 of the same Code), it was understood in the Decision of the Superior Administrative Court of 18/6/2014 (proceedings 01102/13, rapporteur: Aragão Seia) that "Article 60 of the General Tax Law requires that, in this case, the taxpayer be granted the opportunity to exercise its right of prior hearing". It is important to note, however, that although relating to the regime of Article 90 CIRC (prior Article 83 of the same Code), the assessment impugned underlying the litigation is the official assessment resulting from the omission of delivery of the declaration model 22, and not the corrective assessment resulting from late delivery of the declaration, or of a substitute declaration. And this significantly distinguishes the situations, since in the first, which is the subject of the Decision of the Superior Administrative Court in analysis, for the decision a determining factor was the total absence of participation of the taxpayer, precisely because it had not presented the income declaration. Now in our case, the taxpayer delivered, late, the income declaration. Indeed, it is precisely following the submission of the declaration model 22 of 2011 (on 27/10/2015), that the taxpayer was notified (precisely on the same day 27/10/2015) of the correction of the deducted tax losses.

In any case, the Decisions invoked by the Claimant are prior to 2015, at a time when, although the thesis of the saving of the act was dominant, there was some jurisprudential and doctrinal controversy. However, with the new Code of Administrative Procedure of 2015 the Article 5 was introduced in Article 163 (corresponding to the prior Articles 135 and 136), which "in line with an enlarged jurisprudential practice, although contested by a good part of the doctrine, and with the objective of normatively disciplining it, came to admit the non-production of the annulment effect, despite the invalidity, in three circumstances, described in paragraphs (a), (b) and (c) of the said number" (Fausto de Quadros et al, Comments to the revision of the Code of Administrative Procedure, Almedina, 2016, p. 330, note 2).

Thus, with respect to the omission of the essential formality of prior hearing, which as we have already stated is in principle a cause of voidability, establishes paragraph (a) of Article 5 of Article 163 of the Code of Administrative Procedure that "no annulment effect is produced when…the content of the voidable act cannot be other, for the act to be of bound content or the appreciation of the specific case allows to identify only one solution as legally possible".

Now in the case in analysis, as well notes the AT in the Response (Article 47 to 51), the correction to the tax losses deducted in the declaration model 22 of 2011 results from the bound power of correction, owing to circumstances that objectively could not lead to another result on the part of the AT; the late delivery of the declaration model 22 of 2010, the corresponding official assessment issued by the AT using indirect methods which was not challenged by the taxpayer, and the sanction of Article 2 of Article 52 of the CIRC (in the wording effective in 2010), according to which in these circumstances, the losses ascertained in that year (2010) are not deductible. Necessarily the tax losses deducted by the taxpayer in the subsequent 2011 year would have to be disregarded; when it intended that such losses would absorb the taxable profits generated in that year. The tax losses of 2010 necessarily had to be purged. Only this could be the legally possible solution.

As such, the content earlier transcribed of the Circular of AT, invoked to legitimize the omission of notification to the taxpayer to exercise the right of prior hearing does not seem to be contradictory with today's applicable law, the Article 5 of Article 163 of the Code of Administrative Procedure being what truly legitimizes the action of the AT.

Consequently, and for the reasons set out, as to the omission of essential formality, due to failure to notify the Claimant to exercise its right of prior hearing, the Claimant's claim does not proceed. No annulment effect is produced in the assessment. Consequently, the claim brought by the Claimant is without merit in this regard.

1.3 On the power-duty of application of the tax inspection procedure provided for in the RCPITA

The Claimant maintains (84th to 96th of the Initial Petition) that the AT could and should (because it would be a power-duty) have confirmed or corrected the elements declared by it in the declaration model 22 of 2011, through a tax inspection procedure, in the terms of Article 63 of the General Tax Law and of the RCPITA, not having done so (Article 97 of the Initial Petition). In this way, the AT could inspect and validate the elements declared by the Claimant, being equally bound by the safeguard of the guarantees of taxpayers prescribed in Article 63 of the General Tax Law and RCPITA.

And it mentions some of the rules of the RCPITA allegedly violated, by not having adopted the tax inspection procedure, such as:

i. Article 37: The notification of the institution of the pertinent tax inspection procedure to the entity inspected, identifying itself, in particular, the elements sought in the scope of the inspection;

ii. Article 46: The accreditation of the respective officials through the issuance of a service order;

iii. Article 60: The notification of the draft conclusions of the report so that the inspected entity may pronounce itself on the same; or, finally

iv. Article 62 Article 3 paragraph (i): The notification of the final report which contains, in particular, a "description of the tax-relevant facts that alter the values declared or to be declared subject to taxation, with mention and attachment of the means of proof and legal grounds supporting the corrections made".

And as a consequence, says the Claimant (Article 99 of the Initial Petition) that "the contested acts suffer, additionally, the defect of violation of the principle of legality (by not applying the regime to which they were subject - i.e., the regime of the tax inspection procedure enshrined in the RCPITA); of omission of essential legal formality (by virtue of the CLAIMANT not having been notified of the institution of the inspection procedure, of the draft corrections or of the final report); and, as well, of the defect of lack of reasoning (insofar as the correction made was not accompanied by the due «description of the tax-relevant facts that alter the values declared or to be declared subject to taxation, with mention and attachment of the means of proof and legal grounds supporting the corrections made»)".

Let us see.

The provisions of the RCPITA indicated by the Claimant suggest that this considers that the tax inspection procedure, to be such, must be external. Only thus is the Claimant's reference to the necessity of prior notification of the beginning of the procedure and credentials for the AT's officials understood. That is to say, that such procedure will only exist when the inspection acts are effected, wholly or partially, in installations or dependencies of the taxpayers or other tax-bound parties, of third parties with whom they maintain economic relations or in any other place to which the administration has access.

However, Article 13 of the RCPITA is clear in providing that the tax inspection procedure may be either external or internal. With effect, in the terms of paragraph (a) of Article 13, "as to the place of realization, the procedure may be classified as … internal, when the inspection acts are effected exclusively in the services of the tax administration through the formal and coherence analysis of documents".

In accordance with Article 1 of Article 75 of the General Tax Law it is presumed that the statements of taxpayers presented in the terms provided for by law are true. Thus, if the AT does not demonstrate the existence of incoherencies or the lack of correspondence between the content of such statements and reality, its content must be considered true. If on the other hand the declaration models 22 present omissions, errors, inaccuracies or founded indicia (particularly incoherencies) which influence the value of Corporate Income Tax to be paid or to be recovered, that presumption ceases to apply.

Now the entire communication of the AT issued on 27/10/2015 is manifestly revealing of the fact that indeed there existed an internal tax inspection procedure.

Recall that there it says: "Pursuant to (…) the Tax and Customs Authority proceeded to the control of the tax losses indicated in the periodic income declaration model 22. The value of the tax loss deducted (…) evidenced in the declaration model 22 of the 2011 period, does not correspond to the elements contained in the Tax and Customs Authority's database (….) Tax loss declared € 1,814,918.67 € | Tax loss corrected € 1,204,976.64 €" (underlining ours).

Indeed as could not but be the case; without the inspection procedure having existed regarding losses as related, the situation of declaration error would not have been detected, which having influence in the reckoning of Corporate Income Tax to be paid, came to motivate the additional assessment. A priori, as prepared by the taxpayer, the declaration did not justify such assessment.

With effect, the analysis of the tax losses deducted in the declaration model 22 constitutes a tax inspection procedure, which:

i. As to its purpose is classified as a "verification and checking procedure", aiming at the confirmation of the fulfillment of the obligations of taxpayers (cf. paragraph (a) of Article 1 of Article 12 of RCPITA), in particular, the correction of tax losses deducted in the declaration model 22 of 2011;

ii. As to the place of realization, is classified as "internal", given that the inspection acts were effected exclusively in the services of the AT, through the formal and coherence analysis of documents (cf. paragraph (a) of Article 13 of RCPITA), confronting the content of the statement submitted by the taxpayer with the elements contained in the AT's database, dispensing in this way with the cooperation of the taxpayer, from the moment in which the latter submitted the declaration model 22; and

iii. As to the scope and extension, apparently was "partial", for encompassing only the fulfillment (late) of the duty to present the declaration model 22 of 2011 (cf. paragraph (b) of Article 1 of Article 14 of the RCPITA).

Having noted that such procedure existed, let us analyze the defects which the Claimant invokes in the Initial Petition:

i. As to the omission of notification of the institution of the tax inspection procedure (Article 37 of RCPITA), and as to the omission of accreditation of the respective officials through the issuance of a service order (Article 46 of RCPITA), such steps are not required in internal inspection procedures, cf. Decision of the Administrative Court of Appeals of 10/7/2012 (proceedings 05303/12, rapporteur: Eugénio Sequeira) and Decision of the Administrative Court of Appeals of 10/7/2012 (proceedings 05289/12, rapporteur: Eugénio Sequeira);

ii. As to the omission of notification of the draft conclusions of the report so that the inspected entity may pronounce itself on the same (Article 60 of RCPITA), we refer to the prior considerations regarding the non-observance of such formality (in 1.3 of the legal matter), with the due adaptations, and of the corresponding application of Article 163 Article 5 of the Code of Administrative Procedure, making the annulment impossible;

iii. Regarding the alleged omission of notification of the final report which contains, in particular, a "description of the tax-relevant facts that alter the values declared or to be declared subject to taxation, with mention and attachment of the means of proof and legal grounds supporting the corrections made" (cf. paragraph (i) of Article 3 of Article 62 of RCPITA), we believe that in truth the omission did not exist. For the communication of the AT issued on 27/10/2015 comes precisely to relate the inspection procedure performed and its conclusions, duly reasoned (as to the validity of the reasoning, we refer to that which is set out in 1.2 of the legal matter). It is important to note, however, as to the content of inspection reports, that other types of reports may be drawn up, in the case of inspection procedures with specific objectives, whose minimum content will be the identity of the inspected entity, the purpose of the acts, the conclusions obtained and their reasoning, which was observed.

Thus, the impugned additional assessment is precisely the result of the internal tax inspection procedure, which came to correct the declaration model 22 of 2011 late submitted by the taxpayer, in the terms of Article 90 Article 10 CIRC (in the wording effective in 2011), reason for which the claim of the Claimant is without merit when it maintains the illegality of the assessment act in the alleged non-observance of the tax inspection procedure.

IV.3.2. As to Compensatory Interest

2.1 Lack of reasoning as to the demonstration of the exigibility of compensatory interest

The impugned assessment includes an item relating to compensatory interest, which, according to the Claimant, was not supported by any reasoning demonstrative of the verification of the premises, of fact and of law, upon which its exigibility depends.

Specifically, the Claimant affirms that the AT did not demonstrate, as was incumbent upon it, the culpability of the Claimant, the subjective imputation, inherent to the assessment of this interest, as required under Article 1 of Article 35 of the General Tax Law, and as to the burden of proof under Article 1 of Article 74 of the General Tax Law and 342 Article 1 of the Civil Code (Article 101 to 110 of the Initial Petition), emphasizing that the assessment of compensatory interest is not an immediate and automatic consequence of any additional assessment of tax (Article 112 of the Initial Petition).

The AT, for its part, counters that, considering that the declaration model 22 relating to 2011 was corrected (in the scope of the control done by the AT to the deducted losses), from which resulted taxable matter to be taxed in the amount of € 609,942.03, to be contrasted with the official assessment previously promoted (due to the omission of delivery of the declaration within the legally prescribed deadline), "one cannot withdraw that there is no tardiness of compliance with the obligation of assessment of tax by the Claimant" (53rd of the Response). In its understanding, it is to be concluded that the imputation to the Claimant of the tardiness of the entirety of the tax due, by way of negligence, is warranted, insofar as the correction of tax was founded on the letter of Article 52 of the CIRC.

As to the reasoning of decisions calculating compensatory interest, Article 9 of Article 35 of the General Tax Law establishes that "the assessment must always clearly evidence the principal amount of the obligation and the compensatory interest, explaining with clarity the respective calculation and distinguishing them from other obligations due", being therefore these, the minimum elements of the reasoning. Elements which appeared in the note of demonstration "detail of interest assessment", notified personally to the taxpayer together with the notification of the additional assessment and the default interest assessment, reason for which the AT gives the assessment of compensatory interest as reasoned.

Let us see.

The Claimant is right when it affirms that the assessment of compensatory interest is not an immediate and automatic consequence of any additional assessment of tax (Article 112 of the Initial Petition). A subjective imputation is required, a fact that is imputable to it, in terms which allow the judgment of censure of the taxpayer, and which establishes the nexus of causality between that imputation and the tardiness of the tax due, in the terms of Article 35 of the General Tax Law and Article 102 of the CIRC.

And we agree with the view of the AT, that these premises are verified in the specific case. With effect, the tardiness of the tax due, relating to 2011, results from the conjunction of the following facts, presented according to a chronological criterion:

i. Regarding the 2010 tax year the Claimant did not submit the income declaration model 22 within the legally prescribed deadline, 30/5/2011;

ii. In accordance with the law, after notifying the Claimant to regularize the omission of delivery of the income declaration, which did not occur, on 30/11/2011 the AT issued the official assessment No. 2011…, which was based on taxable matter of € 6,790.00;

iii. On 5/3/2014, the Claimant submitted the declaration model 22 relating to 2010, in which there appeared a tax loss of € 3,211,768.46 and deductible losses of € 1,248,518.45;

iv. On 27/10/2015 the Claimant submitted the declaration model 22 relating to 2011, in which there appeared a taxable profit of € 1,814,918.67;

v. The AT, in the same day 27/10/2015, proceeding to the control of the elements of the declarations relating to 2011 and particularly the deducted tax losses, observed that they did not correspond to the elements of its database, and as such determined its correction;

vi. On 17/12/2015, the AT issued the corrective assessment now impugned, on the basis of the corrected taxable profit of the 2011 tax year of € 609,942.03, differing from the official assessment previously issued of € 6,790.00, reflecting thus a difference of € 603,152.03 in taxable matter and approximately € 150,923.00 in Corporate Income Tax (corresponding to the general rate of Corporate Income Tax applicable in 2011).

The nexus of causality between the culpable conduct of the Claimant (the omission and the late submission of the declarations) and the retardation of the full amount of the tax due is evident. With effect, had the Claimant submitted the declaration model 22 of 2011 within the legally prescribed deadline, the AT would have, on that date, possessed the data necessary to appreciate its situation and would have assessed, on that moment, the corrected amount of tax. On the other hand, had the Claimant submitted, on time, the declaration model 22 of 2010, the AT would have disposed of the elements necessary to effect the assessment relating to 2010 with precision and, consequently, would have had the data to proceed with the corrective assessment relating to 2011 on the appropriate date.

Accordingly, the conditions for the assessment of compensatory interest are verified, as the culpability is established by the conduct of the Claimant, the nexus of causality between the said conduct and the tardiness of the tax is manifest, and, therefore, the assessment of compensatory interest is justified.

Nonetheless, we must note that this assessment does not rest on the sole ground of the alleged ignorance of the law by the Claimant. Although the AT relies on Article 6 of the Civil Code, according to which ignorance of the law does not excuse from compliance therewith, this does not eliminate the fact that the Claimant, in truth, is culpable by its omissions in the submission of declarations. It is precisely for these omissions, and not for alleged ignorance of the law, that the compensatory interest is assessed.

Accordingly, regarding compensatory interest, as to the defect of lack of reasoning as to the demonstration of the exigibility thereof, the Claimant's claim is without merit. The assessment of compensatory interest is properly reasoned and the conditions for its exigibility are met.

2.2 Omission of essential legal formality relating to the right of prior hearing as to compensatory interest

The Claimant further states (Article 116 of the Initial Petition) that, just as occurred with respect to Corporate Income Tax, it was not notified to exercise its right of prior hearing, which constitutes "omission of the essential legal formality provided for in Article 60, Article 1, paragraph (a), of the General Tax Law" (Article 116 of the Initial Petition).

Given the considerations made with respect to the corporate income tax above, which, with the necessary adaptations, are equally applicable here, the Claimant's pretension is equally without merit. There is no violation of the right of prior hearing, applying equally the grounds set out in paragraph (a) of Article 5 of Article 163 of the Code of Administrative Procedure.

V. CONCLUSION

By all the reasons above set out, the Tribunal decides:

  1. To reject the claim brought by the Claimant for declaration of illegality of the additional Corporate Income Tax assessment No. 2015…, including the corresponding municipal surcharge, default interest and compensatory interest.

  2. In consequence, all costs and expenses related to the present arbitration are to be borne by the Claimant.

Thus is decided and authorized.

Lisbon, 12 November 2016

The Arbitrators,

(signed)

Fernanda Maçãs

(signed)

Luís Oliveira

(signed)

Nuno Miguel Morujão

Frequently Asked Questions

Automatically Created

Can tax losses be deducted when the IRC Model 22 return is filed late under Portuguese tax law?
Under Portuguese tax law, late filing of the IRC Model 22 declaration creates ambiguity regarding tax loss deductibility. Art. 90(10) CIRC restricts deductions to those known by the Tax Authority when indirect assessment methods under Art. 90(1)(b) or (c) are applied—typically when no declaration exists. However, in Process 109/2016-T, the taxpayer argued that once a late declaration is filed and the Tax Authority bases its assessment on those declared values rather than applying true indirect methods, Art. 90(10) should not apply. The critical distinction is whether the assessment derives from the taxpayer's declaration under Art. 90(1)(a) or from deemed/indirect methods. Late filing alone may not automatically trigger Art. 90(10)'s restrictive regime if the declaration is processed and forms the basis of assessment.
How does Art. 90(10) of the CIRC limit deductions when the Tax Authority applies deemed assessments?
Art. 90(10) CIRC provides that when the Tax Authority determines taxable income through deemed assessment methods under Art. 90(1)(b) or indirect methods under Art. 90(1)(c)—such as when no Model 22 declaration is submitted—only deductions actually known to the Tax Authority and properly allowable under Arts. 2-4 may be claimed. This significantly limits taxpayers' ability to deduct tax losses, expenses, and other amounts that would otherwise be deductible if a proper declaration had been timely filed. The provision's rationale is that when the Tax Authority must reconstruct taxable income without taxpayer cooperation, it can only account for deductions within its actual knowledge. Process 109/2016-T highlights the dispute over whether this limitation applies when a declaration is filed late but the Tax Authority actually relies on declared values rather than independent reconstruction of taxable income.
What are the consequences of failing to submit the Model 22 declaration on time for IRC purposes?
Failure to submit the IRC Model 22 declaration within the legal deadline triggers several consequences: (1) potential application of Art. 90(10) CIRC, which may restrict deduction of tax losses and other amounts to those known by the Tax Authority; (2) exposure to official assessment by the Tax Authority using indirect or deemed methods under Art. 90(1)(b) or (c); (3) assessment of compensatory and default interest on tax due; (4) potential penalties for late filing; and (5) loss of the presumption that the taxpayer's self-assessed values determine taxable income under Art. 90(1)(a). However, Process 109/2016-T raises the question of whether late filing before assessment is completed allows the taxpayer to avoid Art. 90(10)'s restrictions if the Tax Authority actually processes the late declaration rather than applying independent indirect methods.
When can the Portuguese Tax Authority apply indirect assessment methods to determine corporate income tax?
The Portuguese Tax Authority may apply indirect assessment methods under Art. 90(1)(b) and (c) CIRC in specific circumstances: (1) when the taxpayer fails to submit the mandatory IRC Model 22 declaration; (2) when the taxpayer's accounting records are insufficient, incomplete, or unreliable; (3) when declared values cannot be verified or confirmed through available documentation; (4) when the taxpayer refuses to cooperate with tax audits or provide required information; or (5) when there are substantiated grounds to believe the declaration does not reflect actual taxable income. These methods involve the Tax Authority reconstructing taxable income based on indirect indicators, presumptions, or comparable situations rather than relying on the taxpayer's declaration. Process 109/2016-T illustrates the dispute over whether true indirect methods were applied when the Tax Authority accepted most declared values but disallowed tax losses under Art. 90(10).
What rights does a taxpayer have to challenge additional IRC assessments through CAAD tax arbitration?
Taxpayers can challenge additional IRC assessments through CAAD (Centro de Arbitragem Administrativa) by filing a petition under the RJAT (Regime Jurídico da Arbitragem em Matéria Tributária, Decree-Law 10/2011). The process involves: (1) filing a written petition identifying the contested tax act and legal grounds; (2) constitution of an arbitral tribunal (singular or collective) with arbitrators appointed by the CAAD Ethics Council; (3) opportunity to present arguments, evidence, and legal interpretations; (4) binding arbitral award deciding the legality of the assessment; and (5) potential for appeal on limited grounds. Process 109/2016-T demonstrates taxpayers' rights to challenge not only factual determinations but also the Tax Authority's legal interpretation and application of provisions like Art. 90(10) CIRC, including arguments based on principles of legality, equality, proportionality, and good faith in tax administration under Art. 55 of the General Tax Law.