IRS Withholding Tax & Tax Substitution Under Article 103(4) CIRS – CAAD Arbitration 118/2015-T

ARBITRAL DECISION

I. REPORT

1. A…, S.A., (hereinafter referred to as the Claimant) legal person no. …, with registered office at Rua …, no. …, 1º, …-… …, filed on 20-02-2015, pursuant to the provisions of Article 2, No. 1, paragraph a) and Article 10, Nos. 1 and 2, both of Decree-Law No. 10/2011, of 20 January, hereinafter referred to as RJAT (Legal Regime for Tax Arbitration), a request for constitution of an Arbitral Tribunal, in which the Tax and Customs Authority (hereinafter referred to as AT or Respondent) is named as respondent, with a view to pronouncing on the illegality of the acts of assessment of IRS (Withholding at source) No. 2011 … and compensatory interest Nos. 2011 … to 2011 …, relating to the 2008 tax year, as well as the decision rejecting the hierarchical appeal of Her Excellency the Deputy General Director of Taxes.

2. The request for constitution of the Arbitral Tribunal was accepted by His Excellency the President of CAAD on 23-02-2015, and immediately notified to the Respondent in accordance with legal provisions.

3. Pursuant to and for the purposes of the provisions in paragraph a) of No. 2 of Article 6 of RJAT, by decision of His Excellency the President of the Deontological Council, duly communicated to the parties within the prescribed timeframes, the following were designated as arbitrators: Judge Dr. José Poças Falcão as president, and as members, Dr. José Coutinho Pires and Dr. José Rodrigo de Castro, who communicated their acceptance of the appointment to the Deontological Council and the Administrative Arbitration Center within the period stipulated in Article 4 of the Deontological Code of the Administrative Arbitration Center.

4. The Collective Arbitral Tribunal was constituted on 04-05-2015, in accordance with the prescription of paragraph c) of No. 1 of Article 11 of RJAT.

5. On 28 July 2015, the hearing referred to in Article 18 of RJAT was held, where the witness called by the Claimant was heard and the parties were notified to submit written arguments.

6. On 01-09-2015 and 15-9-2015, the written arguments of the Claimant and Respondent respectively were submitted to the file.

7. To support its claim, the Claimant alleged, in summary and relevantly:

i. that it was notified of the acts of assessment of IRS (Withholding at source) No. 2011 … and the corresponding Compensatory Interest Nos. 2011 … to 2011 …, carried out with reference to the year 2008, (article no. 1 of the request for arbitral pronouncement and document no. 2 attached thereto)

ii. not conforming to the same, it filed a petition for review,

iii. that upon rejection of such petition, it filed a hierarchical appeal (Articles 2 and 3 of the request for arbitral pronouncement and documents Nos. 3 and 4 attached thereto),

iv. in the face of the order determining the rejection of the hierarchical appeal, it filed the present request for arbitral pronouncement with CAAD,

v. throughout its petition it raises various issues, notably invoking the lack of substantiation of the underlying assessment acts and the omission of essential legal formalities,

vi. pleading for the nullity of the assessment based on the non-existence of taxable facts, basing its position and in brief summary on the interpretation it conducts of No. 4 of Article 103 of CIRS,

vii. sustaining, in sum, that the regime provided therein of joint and several liability for payment relates to the coercive phase of tax collection and not to the phase of voluntary payment thereof,

viii. further arguing that the interpretation conducted by the Tax Administration "violates frontally the tax legislation in force. As well as some of the most important fundamental principles of the tax system" (Article 94 of the request for arbitral pronouncement),

ix. further densifying that "Article 103 No. 4 of CIRS, interpreted in the sense that the tax not withheld can be exclusively and immediately demanded from the substitute after its assessment, without being demanded previously or simultaneously from the principal is materially unconstitutional by violation of the constitutional principles of contributive capacity, legality, equality and proportionality, as well as the rights to property and private initiative, of Articles 104, Nos. 1 and 2, 61 and 62, 266 No. 2, of the Constitution of the Portuguese Republic". (Article 137 of the request for arbitral pronouncement)

x. concluding as is extracted from its petition, that the illegality of the act of additional assessment of withholdings at source on income tax for individuals, and respective compensatory interest be declared, as well as the illegality of the order rejecting the hierarchical appeal,

xi. further petitioning the recognition of the right to indemnification for security improperly provided,

xii. the Claimant attached to its request for arbitral pronouncement an opinion by Professor Dr. B… where considerations are made regarding the matter at hand.

1. The AT, in its response, sustaining a position contrary to that presented by the Claimant, and in accordance with the position it had already assumed in the petition for review and hierarchical appeal proceedings, and having as reference that the Claimant paid monthly to its employees amounts that constituted true remuneration, argues that such "allowances" should have been subject to withholding at source and, having failed to do so, the Claimant is jointly and severally liable for the payment of the non-withheld amounts in accordance with the provisions of No. 3 of Article 104 of the Code of Income Tax for Individuals, pleading, consequently, for the dismissal of the request for arbitral pronouncement filed by the Claimant.

2. The parties further came, pursuant to the provisions of Article 18 of RJAT, to submit written arguments, where, fundamentally, they reiterate and defend the positions they had already evidenced in their pleadings.

3. The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to Articles 2 No. 1 paragraph a), 5 and 6 No. 1 of RJAT.

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

5. The proceeding does not suffer from nullities, and no exceptions were raised, so it is appropriate to consider and decide on the merits of the claim:

II. SUBSTANTIATION

A. MATTERS OF FACT

A.1. Facts established as proven

1. The now Claimant is a public limited company, with registered office at Rua … no. …- 1º in …, tax identification number …, which since 26/11/2012 has been registered for the exercise of "activities of Temporary Work Companies" to which CAE 78200 applies,

2. For VAT purposes, it falls within the Normal Regime with monthly periodicity and for CIT purposes within the General Regime.

3. On 14/06/2011 by the District Finance Directorate of Porto, inspection order no. 0I2011 … was issued, which determined an audit of the Claimant, which began on 01/07/2011,

4. The audit of the Claimant's accounts "originated from the fact that personnel costs shown in Annexes A of the Annual Declarations of Accounting and Tax Information were significantly higher than the values shown in Annexes J submitted by SP, added to the value of the contribution to Social Security borne by the taxpayer, and consequently higher than the total values declared by the various employees with Category A income for IRS, paid in 2008 and 2009."

5. The assessment acts, underlying nos. 2011 …, (IRS- Withholding at source) and nos. 2011 … to 2011 … (Compensatory Interest), were determined as a result of the aforementioned audit;

6. On 10 February 2012, the Claimant filed a petition for review against the aforementioned assessments, to which it was assigned no. … 2012 … (cf. document no. 3 attached with the request for arbitral pronouncement);

7. Dated 9 July 2012, an order rejecting said petition for review was issued by the Senior Economist Advisor of the DDF of Porto, by delegation of authority from the Finance Director of Porto (PA Annex 1)

8. Such rejection order was notified to the Claimant through Official Memorandum no. …/…/2012 of 11 July 2012 and received by it;

9. Following which, on 08 August 2012, the Claimant filed a hierarchical appeal to which was assigned no. …/2012; (cf. document no. 4, attached with the request for arbitral pronouncement and PA annex)

10. The hierarchical appeal in question was totally rejected by order of 24 October 2014, issued by Her Excellency the Deputy General Director of Taxes, and notified to the now Claimant on 24 November following, through Official Memorandum no. … (PA annex);

11. On 22 February 2015, the Claimant filed its request for arbitral pronouncement with CAAD, which gave rise to the present proceeding.

From the tax audit report, it further appears, and relevantly, that:

"A… is holder of License no. … from the Institute of Employment and Professional Training (IEFP), being thus authorized to exercise temporary work activity, provided for under Articles 5 to 8 of Decree Law No. 260/2009, of 25 September",

"From the analysis of the analytical trial balances before profit determination of the fiscal years, it is verified that A… recorded therein, in various sub-accounts of the POC account - "64- Personnel Costs", amounts paid as allowances to its employees in annual amounts of 1,023,589.98 € and 1,291,025.04 €, respectively, excluding those which it already considered as Category A income for IRS"

"The employment contracts concluded by A… with temporary workers normally establish, in clause six, the workplace of the temporary worker, a workplace that corresponds to the necessary workplace provided for in Decree-Law No. 106/98, of 24 April, and Decree-Law No. 192/95, of 28 July."

"In the service provision contracts concluded with its clients, the transferred workers are not identified, and the reference salary for each worker category is established (all-inclusive), as well as the hourly amount charged by A... per category and for each transferred worker",

"In the invoices issued to its clients, A... does not mention the number of transferred workers, does not identify them and does not break down the amounts invoiced as service provision and as allowances for each of them, with only a single item appearing in its invoices "Supply of personnel for works at your site no. ------" with an indication of the period to which the invoicing relates, with a stamp appearing in the lower portion of its invoices bearing the title "Declaration" followed by the following text "For purposes of the provision of paragraph f) of Article 42 of CIRC, new wording given by No. 1 of Article 30 of Law No. 87-B/98 of 31 December, we declare that the present invoice expressly includes Allowances in the amount of" with a value of supposed allowances included in the total invoiced appearing manually written in a space provided for that purpose"

"A... maintains monthly itinerary journals prepared by the company itself and without the signature of the employees to whom they relate, identifying the worker (name and professional category) and demonstrating the days, type of service, location and daily allowance that gave rise to its allocation, it being found that a large part of the aforementioned allowances aim to compensate workers for necessities carried out to their homes, localities in which they contractually agreed to exercise their work activity, so the same constitute effective remuneration of paragraph d) of No. 3 of Article 2 of CIRS, combined with D.L. No. 106/98, of 24 April, which should have been, upon their allocation, subject to withholding at source, A... being, under No. 4 of Article 103 of CIRS, jointly and severally liable for the payment of the non-withheld amounts";

"A..., by the mere fact that the workers go to work at a particular site of the temporary work user company and this implies travel, considers that from this fact the right to allowance arises […];

"[…] the benefits received as "allowances" which correspond to travel to the workplace set out in the employment contracts constituted part of their allocation or remuneration, forming a supplement thereto, since they were allocated to the worker regardless of the existence on those same days of any occasional travel undertaken in the service of the employing entity, so these amounts should be considered as employee income subject to IRS, under Article 2 of CIRS and Decree-Law 106/98."

A.2. Facts established as not proven

For purposes material to the decision of the case, there are no facts that should be considered as not proven.

A.3. Substantiation of the factual matters established as proven and not proven

With regard to factual matters, the Tribunal does not need to pronounce on everything alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to distinguish the proven from the unproven matters [cf. Article 123 No. 2 of CPPT and Articles 607 of CPC. Applicable by operation of Article 29, No. 1, paragraphs a) and ) of RJAT)].

Thus, the facts pertinent to the judgment of the case are selected and identified according to their legal relevance, which is established in attention to the various plausible solutions of the question(s) of law (cf. Article 596 of CPC, applicable by operation of Article 29, No. 1, paragraph a) of RJAT).

Thus, having regard to the positions assumed by the parties, the documentary evidence submitted to the file, the PA annex and the testimonial evidence produced, the facts listed above are considered proven, with relevance to the decision, recognized and accepted by the parties.

B. ON LAW

1. Questions to be decided

It appears to this Arbitral Tribunal that the Claimant does not so much question the qualification of the amounts here in issue in the amount of 112,868.00 € (amount excluding compensatory interest) and made available to its employees during the year 2008 which it treated accountingly and fiscally as "allowances", should, as a result of the audit conducted by the AT, come to be qualified as remuneration to its employees and consequently subject to withholding at source, in accordance with the provisions of Articles 98 and following of CIRS.

Furthermore, the Claimant emphasizes its argument in the divergence of interpretation conducted by the AT regarding No. 4 of Article 103 of CIRS and as to its responsibility concerning the payment of withholding at source amounts.

Petitioning, accordingly, that the illegality of the total rejection of the hierarchical appeal already identified be declared and, consequently of the assessment acts of IRS and respective compensatory interest relating to withholdings at source with reference to the civil year 2008, thus reducing the central question of the present proceeding to determining whether the assessments made in the name of the Claimant, and notified to it, based on the provision of Article 103, No. 4 of CIRS, suffer or do not suffer from illegality.

Law No. 99/2013, of 27 August, which approved the Labour Code[1], after defining in its Article 10 that "the employment contract is one by which a person undertakes, for remuneration, to provide his activity to another or others under their authority and direction", in Chapter III- Remuneration and other patrimonial allocations, under Article 249, determines that:

"1. Only what the worker is entitled to under the terms of the contract, the rules governing it or customs is considered remuneration as consideration for his work.

1. In the consideration for work is included the base remuneration and all regular and periodic benefits paid directly or indirectly, in money or in kind.

2. Until proven otherwise, any and all benefit provided by the employer to the worker is presumed to constitute remuneration.

3. The qualification of a certain benefit as remuneration, in accordance with Nos. 1 and 2, determines the application of the regimes of guarantee and protection of credit rights provided for in this Code".

Providing further in Article 260 - "allowances and other benefits" – the following:

"1. Amounts received as allowances, travel benefits, transport expenses, installation benefits and others equivalent, due to the worker for travel, new arrangements or expenses incurred in the service of the employer, are not considered remuneration, except when such travel or expenses are frequent, those amounts, in the part exceeding the respective normal amounts, have been provided for in the contract or should be considered by custom as an element of the worker's remuneration,

1. The provision of the above number applies, with the necessary adaptations, to the allowance for absences and meal subsidies".

On the other hand, in paragraph d) of No. 3 of Article 2 of CIRS, (wording at the time) included as Category A employment income, "allowances and amounts received for the use of own vehicle in the service of the employing entity, to the extent that both exceed the legal limits or when the assumptions of their payment to State employees are not observed and sums for travel, journey or representation expenses for which no accounts have been rendered by the end of the fiscal year."

• We can thus and thereby conceptualize, in summary form, invoking for this purpose the doctrine flowing from the Judgment of the Central Administrative Court of the South of 06 May 2003, reported by then Court of Appeal Judge Dulce Neto that: "remuneration appears as a set of values, expressed or not in currency, to which the worker is entitled, by contractual or normative title, corresponding to a duty of the employing entity, incorporating all benefits granted by the employing entity that are intended to be part of the worker's normal budget, affording him the just expectation of its receipt given its regularity and periodic continuity", whereas the "allowances […] aim to compensate the worker for expenses incurred in the service of and in favor of the employing entity and which, for reasons of convenience, were borne by the worker himself, not constituting a counter-value of the worker's benefit, characteristic of remuneration". [2]

To conclude in this segment, that the amounts made available to the Claimant's employees in the conditions in which they were, and as results from the above stated, do not constitute "allowances", but rather a remunerative supplement with tax implications, namely in terms of subjection to taxation and consequently to withholding at source.

It will also be necessary and even before addressing the thema decidendum, and taking into account the "preliminary" questions that were raised by the Claimant throughout its pleading, that they be decided from the outset, resulting from the provisions of Articles 124 of the Tax Procedure and Process Code and Article 608 of the Code of Civil Procedure.

They will be addressed, in summary, and in the order in which they were presented, comparing them (to the extent possible) with the position that the AT evidences on them.

• Lack of substantiation of assessment acts and omission of essential legal formalities

In brief summary, the Claimant alleges that the underlying assessment acts lack substantiation in that they do not fulfill the requirement of Article 77 of the General Tax Law (LGT), thus meaning that "there is not sufficient and necessary substantiation, of fact and of law".

It argues in this sense, invoking relevant doctrine that the "duty of motivation or substantiation of any administrative or tax act has associated two purposes: (i) on one hand, to inform the respective addressee of the reasons or motives that led to the taking of a decision in a certain direction; and (ii) on the other hand, to allow for control over the legality of the decision and the validity of the reasons underlying a concrete decision", concluding that the assessment acts for tax and compensatory interest were practiced in violation of the provision of Article 268 No. 3 of CRP and Article 77 of LGT, and should therefore be annulled, further claiming with equal consequence the fact that it was not notified in accordance with the provision of paragraph a) of No. 1 of Article 60 of LGT.

For its part, the AT, in opposition to the Claimant's thesis, argues, in summary, that notwithstanding the substantiation contained in the notification of the assessments being summary, in the same the origin thereof is identified as relating to withholdings at source and compensatory interest with indication of the year to which they relate and indication of their amount, which by itself would allow the addressee to "associate them with the Tax Inspection Report, of whose substantiation it had recently been notified"

With regard to the invoked omission of essential formality with obvious reference to the exercise of the right of hearing provided for in No. 1 of Article 60 of LGT, the Respondent argues that it had already been exercised by the Claimant within the scope of the audit procedure, invoking the provision of No. 3 of Article 60 of LGT, to justify the waiver of new hearing, basing itself further on the doctrine flowing from the Judgment of the STA of 16/05/2012, within the scope of proceeding no. 0675/11.

Let us see then:

It is unquestionably established and consensual that administrative acts must be the subject of substantiation, a duty moreover with constitutional acceptance, in No. 3 of Article 268 of CRP, according to which "administrative acts are subject to notification to interested parties, in the form provided by law, and require express and accessible substantiation when they affect rights or legally protected interests", specified in ordinary law in Articles 124 and 125 of the Administrative Procedure Code[3] for administrative acts in general, and in Article 77 of the General Tax Law for tax administrative acts.

Paraphrasing Diogo Freitas do Amaral,[4] "the substantiation of an administrative act consists in the explicit enumeration of the reasons that led its author to practice that act or to give it a certain content".

As regards the substantiation of tax acts, No. 2 of Article 77 of LGT determines that "the substantiation of tax acts may be carried out in summary form, and must always contain the applicable legal provisions, the qualification and quantification of tax facts and the operations of determining the taxable matter and the tax"

Substantiation which, moreover, assumes certain singularities depending on the presence of situations of "abnormal" relevance for taxpayers.

On the other hand, and as a corollary of the obligation to substantiate administrative acts, there will be the exercise of the right of hearing which, ultimately, will have the effect that the administrated party can confront the arguments produced against it.

Now, having regard to the fact that the Claimant had knowledge of the draft tax audit report, that it exercised the right of hearing with regard thereto under the provisions of Article 60 of LGT and Article 60 of the Complementary Tax Audit Procedure Regime (RCIPT), that it was notified of the (final) tax audit report and that the grounds for the corrections expressed therein support the assessment of the tax in question, it does not appear to us sustainable that the Claimant – as regards the underlying assessments – come to argue for ignorance of the cognitive path that led to them.

In this segment and without need for further considerations, we follow the doctrine extracted from the Judgment of the Central Administrative Court of the South of 12/12/2006 (issued within the scope of proceeding no. 00159/04) to conclude and as is partially extracted therefrom:

"[…] Substantiation must respect three essential principles: sufficiency, clarity and congruence. The principle of sufficiency means that the substantiation must extend to all elements chosen by the administration so that the logical and legal path of the procedure terminating in the final decision may be reconstructed: The principle of clarity requires that the substantiation be intelligible without ambiguities or obscurities, taking into account the figure of the normal addressee who in the concrete situation must understand the decisive reasons and justification for the decision.

Finally, the principle of congruence means that there must be consonance between the normative assumptions of the act and its grounds. The adoption of grounds that by contradiction do not concretely clarify the motivation for the act is equivalent to lack of substantiation.

In the case "sub judice" consideration must be given to the fact that the challenged assessment was preceded by an inspection action that gave rise to the tax audit report attached to the file and in due time made known to the challenger.

As Casalta Nabais writes (Casalta Nabais, Tax Law, Almedina, 2001, pp. 252 et seq) that the assessment "lato sensu" or as a set of all operations intended to determine the amount of tax, comprises; 1) the subjective assessment intended to determine or identify the taxpayer or passive subject of the tax legal relationship, 2) the objective assessment through which the taxable or collectable matter of tax is determined, 3) the assessment "stricto sensu" translated in the determination of the tax through the application of the rate to the taxable or collectable matter, and 4) the (possible) deductions from the tax "(…).

Thus, the assessment must be analyzed together with the tax audit report, of which it is a consequence.

Having examined the content of the report attached to the file and its articulation with the assessment duly notified to the taxpayer, it is verified that it is properly substantiated, without ambiguities or obscurities, nor any contradiction.

Under these circumstances, the challenger cannot, in good faith, allege ignorance of the "cognitive path" that determined the issuance of the administrative act which it now challenges, because everything was made known to it exhaustively, mentioning the reasons for which the corrections were made (…)

As in the judgment just partially transcribed, and in light of what we have stated, the Claimant has no grounds whatsoever regarding the lack of substantiation of the assessment acts.

The same applies as to the omission of its notification for the exercise of the right of hearing provided for in paragraph a) of No. 1 of Article 60 of LGT, here it is appropriate to recall that the Claimant had already exercised its right within the scope of the draft tax audit report, that the facts raised therein were taken into account within the final report (as appears therefrom) and that the case law goes in the direction of waiver of hearing before assessment if it has already been exercised before the conclusion of the tax audit report, in accordance moreover with the provision of No. 3 of Article 60 of LGT: "having the taxpayer been previously heard at any of the stages of the procedure referred to in paragraphs b) to e) of No. 1, hearing before assessment is waived, except in the case of invocation of new facts on which it has not yet pronounced"

Even before addressing the central question underlying the present proceedings, it seems appropriate to consider the underlying factual framework:

(i) the claimant pursues its corporate purpose within the scope of temporary provision of its workers to third parties,

(ii) with these establishing contracts for the use of its temporary workers,

(iii) and with these celebrating temporary employment contracts where in addition to a monthly net remuneration the payment of "allowances" is provided for.

1. The thema decidendum

On the nullity of assessment based on non-existence of taxable facts

From what is extracted from the Tax Audit Report (RIT), the Claimant made available to its employees in 2008 (and also in 2009) certain amounts that it considered and treated from the accounting and tax point of view as "allowances", not considering them as dependent employment income (Category A), not consequently communicating to its employees that such amounts would be subject to IRS and not carrying out any withholding thereon.

Faced with this factual framework and on which it appears there are no divergences between the parties, it seems to us pertinent to invoke the provision of No. 4 of Article 103 of CIRS, and to analyze, albeit summarily, the institute of responsibility in the case of substitution and withholding at source and the figures of tax substitution, the regime of joint and several liability and subsidiary liability, so as to verify whether the AT's action concerning the underlying assessments was carried out within its respective legal framework.

Not without first opening a parenthesis to note (as already stated earlier) that the Claimant appears not to question in this case that the amounts, identified within the inspection proceeding, paid or made available to its employees did not have the nature of allowances, but rather of remuneration to its employees, as such subject to tax and to withholding at source, putting, as we discern, only the regime and responsibility for such payments in issue.

It is unquestionable that when we speak of passive subjects of the tax legal relationship, we are faced with different realities and agents, with degrees of responsibility regarding the fulfillment of the various tax obligations equally differentiated, whether these constitute the principal obligation of payment (Article 31 No. 1 of LGT), or obligations of an accessory character (Articles 31 No. 2 of LGT).

The passive subject of the tax relationship, in accordance with the provision of No. 3 of Article 18 of LGT "is the natural or legal person, the patrimony or the organization of fact or of law which, under the terms of the law, is bound to fulfill the tax benefit, whether as direct taxpayer, substitute or responsible".

The confrontation between the passive subject, the taxpayer and the debtor of the tax has been the subject of exhaustive study by doctrine, emphasizing the distinction among the various regimes that shape them, and it can be affirmed, and for what is relevant here, that in face of the command of No. 1 of Article 20 of LGT, tax substitution occurs when by imposition of law "the tax benefit is required from a person different from the taxpayer" whose effectuation is carried out – No. 2 of Article 20 of LGT - "through the mechanism of withholding at source of the tax owed",

For what matters to us (not being this the appropriate place for reflections that this subject raises), it can be summarized that one would be faced with tax substitution, in the conditions in which, by legal imposition, the tax benefit will be delivered to the active subject of the tax legal relationship (fiscal authority) not by the subject that performed the tax act, but by a third party with whom it maintains special relationships.

According to the summary proposed by Joaquim Freitas da Rocha[5], the following emerge as characteristics of tax substitution:

(i) whoever delivers the tax to the creditor is not the subject itself that performed the tax act or that received the benefit in question, but rather a third party;

(ii) this third party is chosen by the law itself according to various criteria (there are no substitutions by will of the parties or by agreement);

(ii) this third party will not suffer the patrimonial loss or pay the tax "from his own pocket" but will demand the respective sum from the subject that performed the tax act".

The interposition of the third party within the framework of the tax legal relationship will have in practice and as obligation that of "deducting portions of the income paid or made available to the passive subject, to then make its delivery to the Tax Administration"[6]

The financial technique by which tax substitution is effectuated is withholding at source, which relates to the fact that certain income, when paid or made available to the respective beneficiaries, is subject to an amputation as payment of the tax, with the respective creditor receiving a lesser amount.

Providing further within the framework of this figure the distinction between what doctrine classifies as total tax substitution or withholding at source as final, of which examples are the tax-relieving rates provided for, particularly in Article 71 of CIRS, of partial tax substitution, (which concerns us), which is carried out as payment on account of the ultimate tax owed.

Paradigmatic example of the tax substitution just sketched out in broad strokes – which, as mentioned, doctrine classifies as withholding as provisional or on account of the ultimate tax owed - is unquestionably that which flows within the contractual relationship established between the employing entity and the employee (Category A).

The rule established in Article 98 of CIRS applies here, in the sense that: "in the cases provided for in Articles 99 to 101 and others established by law, the entity owing the income subject to withholding at source, the registering or depositing entities, as the case may be, are obliged, at the time of payment, of the salary, even if presumed, in its making available, of its settlement or determination of the respective quantitative, as the case may be, to deduct therefrom the amounts corresponding to the application of the rates therein provided as payment on account of the tax relating to the year in which these acts occur"

With regard to tax responsibility, it seems decisive to establish the difference between the regime of subsidiary liability and joint and several liability, making use of the regime that flows from them in other systems than the tax system.

It can be affirmed, in the first place, that the regime of tax subsidiary liability operates on a plane of verticality which presupposes that those called upon to assume responsibility (e.g., payment of taxes) will only be convoked to such obligation, that is to the payment of tax, for debts of another person or entity by insufficiency of their patrimony, such calling, concretized, by and large, through fiscal reversion. (cf. Article 23 of LGT).

The responsibility of which we speak here is carved out, for part of doctrine, within the framework of guarantee, the obligation that flows from it being assumed as accessory, relative to what weighs on the principal debtor, "being equivalent in practice to the joining of one more patrimony (that of the responsible party - guarantor) to the patrimony of a certain defaulting debtor, in situations where the law so determines" (Joaquim Freitas da Rocha, work and place cited)

Differently, in the regime of joint and several liability, this acting on a plane of horizontality, the creditor may indistinctly demand its credit from any of the responsible/debtors.

The regime provided for in Article 512 of the Civil Code applies here, according to which: "the obligation is joint and several, when each of the debtors responds for the full performance and this releases all, or when one of the creditors has the power to demand, by himself, the full performance and this releases the debtor toward all of them".

Having revisited, summarily, the framework of the various institutes in question, we are in a position to address the regime of responsibility within the scope of tax substitution, which concerns us.

The following was the provision of Article 103 of CIRS, before the amendment/addition that was introduced to it by Article 46 of Law No. 53-A/2006, of 29 December;

Article 103

Responsibility in case of substitution

In case of tax substitution, the obligated entity is responsible for the amounts withheld and not delivered to the State coffers, with the substitute relieved of any responsibility for its payment, without prejudice to the provisions of the following numbers.

When withholding is carried out merely as payment on account of the ultimate tax owed, the responsibility for non-withheld tax rests with the substitute to the substitute, subsidiary responsibility falls on the substitute, who is further subject to compensatory interest owed from the end of the delivery deadline to the end of the deadline for presentation of the declaration by the party responsible or until the date of delivery of the withheld tax.

In the remaining cases, the substitute is only subsidiarily responsible for the payment of the difference between the amounts that should have been deducted and those that actually were"

Law No. 53-A/2006, of 29 December (State Budget Law 2007) added to the provision a No. 4 (and also a No. 5) in the following sense:

"4. Where income subject to withholding at source has not been accounted for or communicated as such to the respective beneficiaries, the substitute assumes joint and several liability for the non-withheld tax".

In the Report of the State Budget for 2007 (at pages 26 et seq) after establishing that one of the main measures of tax policy relates to "strengthening the fight against tax fraud and evasion, namely through deepening anti-abuse clauses" expressly references the "institution of a regime of joint and several responsibility of the substitute for the non-withheld tax to the beneficiaries of income in situations qualified as fraudulent practices related to the omission or reduction of the amount of remuneration paid, whether by its non-accounting, whether by its characterization as income not subject to taxation (e.g., allowances)"(underlined by us).

The legislative amendment produced, and for what is relevant here, instituted a regime of responsibility for the income-withholding entity in its capacity as substitute, in line with the beneficiary thereof (substitute/worker), that is, it created in the provision of the said provision a regime of joint and several liability, even before the coercive phase of tax collection.

An interpretation in which we dissent from that advocated by the Claimant, based on the general rules of interpretation of tax laws, accepted in the General Tax Law, particularly in its Article 11:

Article 11

Interpretation

"1. In determining the meaning of tax norms and in qualifying the facts to which they apply, the general rules and principles of interpretation and application of laws are observed.

1. Whenever, in tax norms, terms proper to other branches of law are used, they must be interpreted in the same sense they have therein, unless something else directly results from the law.

2. Persisting doubt as to the meaning of the applicable incidence norms, account must be taken of the economic substance of the tax facts.

3. Gaps resulting from tax norms covered by the reservation of law of the Assembly of the Republic are not susceptible to analogy integration".

The "general principles of interpretation" to which the transcribed No. 1 refers us are established in Article 9 of the Civil Code, which reads as follows:

Article 9

Interpretation of law

"1. Interpretation should not be confined to the letter of the law, but should reconstruct from the texts the legislative thought, taking especially into account the unity of the legal system, the circumstances in which it was elaborated and the specific conditions of the time in which it is applied.

1. However, the legislative thought that does not have in the letter a minimum of verbal correspondence, even if imperfectly expressed, cannot be considered by the interpreter.

2. In fixing and scope of the meaning and scope of the law, the interpreter will presume that the legislator adopted the most correct solutions and knew how to express his thought in adequate terms".

It is thus in light of these principles and equally taking into account the intention and the purposes sought by the legislator underlying the amendment made to Article 103 of CIRS that we find no grounds to disagree with the interpretation that the AT made of the same, translated and embodied in practice, and in face of the regime of joint and several liability established therein, in the possibility of demanding payment of the tax indistinctly, from the substitute or the substitute, in accordance with the regime in question.

Concluding further, and as will be seen, that the legislative amendment in question, materialized in joint and several liability between substitute and substitute in the conditions expressly provided therein and taking into account the purpose sought with it, does not affront any principles of the "tax constitution" or norms of the tax legal system.

The Claimant in defense of its thesis further subscribes that the interpretation of No. 4 of Article 103 of CIRS, in the wording given to it by the State Budget Law 2007, conducted by the AT, in the sense of "making it possible to demand the non-withheld tax still, in the phase of voluntary payment, and no longer, only, in the phase of coercive collection" (cf. Article 93 of the request for arbitral pronouncement) violates various constitutional principles, among which the principle of contributive capacity, tax equality, proportionality in a broad sense and coherence of the tax system, basing itself for this on an opinion authored by Professor B… attached with its pleading under document no. 6.

As to the violation of the constitutional principle of contributive capacity, it must be taken into account, subscribing here to the position of Manuel Faustino[7], that "the criteria generally invoked to justify the allocation of tax burdens to taxpayers are based nowadays on two fundamental theories: the benefit theory and the contributive capacity theory. For the former, each beneficiary of goods and services provided by the State must bear the respective costs: those with resources that allow access to the use of goods and services pay. For the latter, there should be no relationship between the use of goods and services provided by the State and the duty to bear them; one pays who can and to the extent that one can, regardless of the use of services that the tax aims to make possible. The burden has no direct relationship with the actual utility that public goods may have for the taxpayer".

Contributive capacity being an economic legal concept[8], relates to the principle that "all citizens must pay taxes on all of their income, and to the extent thereof", a principle normativized in Article 4 of LGT:

Article 4

Assumptions of taxes

"1. Taxes are based essentially on contributive capacity, revealed, under the terms of the law, through income or its use and patrimony.

1. Taxes are based on the concrete provision of a public service, on the use of a public domain asset or on the removal of a legal obstacle to the conduct of private parties.

2. Special contributions that are based on the obtaining by the passive subject of benefits or increase in value of its assets as a result of public works or the creation or expansion of public services or on the special wear of public assets occasioned by the exercise of an activity are considered taxes."

Although, in the specific case of No. 4 of Article 103 of CIRS, we are not specifically dealing with "income", the truth is that we do not see (contrary to what the Claimant infers) that by virtue of the legislator having introduced a regime of joint and several liability in the payment of a tax in the specific conditions in which it did, it would follow any violation of the principle of contributive capacity, even if such regime is verified in the phase of voluntary payment.

We are not properly faced with the creation of any "new" tax, but rather with the alteration of a regime of responsibility in the case of non-fulfillment of a norm whose observance and fulfillment is the responsibility of the tax authority.

As to the violation of the constitutional principle of tax equality:

The structuring constitutional dimension of the principle of equality has expression in Article 13 of the Constitution of the Republic in the sense that "all citizens have the same social dignity and are equal before the law.", from this resulting a principle of generality or universality of taxation in the sense that "all should contribute to the expenses of the State" an equality before or public charges and equality of sacrifices.

"Tax equality is today understood as material equality, postulating not only the consideration of contributive capacity, but also the introduction of criteria of contributive justice and substantial equality, mindful of the fact that the equality of sacrifice of people with different incomes points to the progressivity of tax rates and to the personalization of the tax."[9]

However, the material dimension of the principle of tax equality, will not enclose in itself an absolute end, translated in the prohibition of differentiation or discrimination.

The General Tax Law itself, in enumerating under Article 7 the "objectives and limits of distribution" provides in No. 3 that "taxation does not discriminate any profession or activity nor prejudice the practice of legitimate acts of a personal character, without prejudice to exceptional increases or benefits determined by economic, social, environmental or other purposes."

Even if one understood the Claimant's thesis, which we do not subscribe to, in the sense that one is faced with "a violation of the principle of material equality, since all companies are forced, even those in financial difficulties, to answer for the taxes owed by their employees, even when the latter has already paid the remuneration in gross" (cf, Article 120 of the request for arbitral pronouncement) one would still not be faced with any violation of the principle of tax equality, re-centering here the fundamental question that the legislative amendment that convenes us, has solely underlying a regime of joint and several liability for payment, in the conditions in which withholding at source was obligatory on account of the ultimate tax owed and not already, with any other realities, namely the consideration that it was not owed because of its consideration as "allowances".

With regard to the alleged violation of the constitutional principle of proportionality or principle of prohibition of excess, and as has been understood, we can materialize it "as a structuring constitutional principle and densifier of the State of Law itself, presents as significant dimensions the requirements of:

(i) adequacy, that is the measure that will be introduced into the legal system must be qualitatively certain to pursue the purpose that in the concrete case is sought;

(ii) necessity or that is, the restrictive intervention should only be carried out if another less burdensome cannot be carried out; and

(iii) proportionality in a strict sense, which means that the restrictive measure must be quantitatively appropriate (i.e., not excessive) in relation to the purpose at hand"[10]

As referred to administrative activity, the principle in question appears positivized (along with other structuring principles) in No. 2 of Article 266 of the Constitution in the sense that "administrative bodies and agents are subordinate to the Constitution and to the law and must act, in the exercise of their functions, with respect for the principles of equality, proportionality, justice, impartiality and good faith"

The Constitutional Court in the various times it has been called upon to pronounce on the principle of proportionality (or prohibition of excess) has not departed from the classical construction of doctrine as to the aspects of its dimension and density in a different form from that just mentioned.

In Judgment No. 632/2008 of 23/12/2008, (with express reference to the Judgment of the same Court No. 634/93), it can be read:

"The principle of proportionality unfolds into three sub-principles: [11]

Principle of adequacy (restrictive measures of rights, freedoms and guarantees must prove to be a means for the pursuit of the purposes sought, with safeguarding of other rights or constitutionally protected assets);

Principle of necessity (such restrictive measures must be required to achieve the purposes in view, since the legislator does not have other less restrictive means to achieve the same goal);

Principle of just measure or proportionality in a strict sense (excessive, disproportionate measures must not be adopted to achieve the intended purposes […]"

It can still be extracted from Judgment No. 632/2008, of 23-12-2008, with respect to the dimension "proportionality in a strict sense or criterion of just measure" that "what is here measured, in truth, is the relationship concretely existing between the coercive burden resulting from the measures that one seeks to achieve. Or, as was also said in Judgment No. 187/2001, "[t]he requirement is [...] to require the intervention, in its restrictive or injurious effects, to be found in a 'calibrated' relationship - of just measure with the purposes pursued, which requires a weighing, graduation and correspondence of the effects and possible measures"

Concluding, equally, that the legislative amendment in question, materialized in joint and several liability between substitute and substitute in the conditions expressly provided therein and taking into account the purpose sought with it ("institution of a regime of joint and several responsibility of the substitute for the non-withheld tax to the beneficiaries of income in situations qualified as fraudulent practices related to the omission or reduction of the amount of remuneration paid, whether by its non-accounting, whether by its characterization as income not subject to taxation (e.g., allowances)", does not affront any principles of the "tax constitution" or norms of the tax legal system.

In truth, we are not (contrary to what the Claimant subscribes) faced with the creation of a new tax (or autonomous taxation) but rather with an alteration to the regime of specific tax responsibility in the provision of tax substitution situations, to which the legislator proceeded having in view the objectives underlying it.

As to the violation of the principle of coherence of the tax system, we hold that the regime of joint and several liability in question does not scratch it minimally in face of the content of Article 103 No. 1 of the Constitution of the Republic.

There is stated, indeed, that the "tax system aims at the satisfaction of the financial needs of the State and other public entities and a just distribution of the income in question".

We subscribe here to the discourse of Vasco Nuno Coelho Martins[12] in highlighting that a tax system in qualifying itself as an aggregating regime of its taxes, "does not mean solely the agglomeration of the various tax figures, that is, the set of the various taxes present in a given tax-legal system. For such a constructed tax system lacks a framework of values that configure it and that safeguard the harmony of its various legal figures, so as to ensure their consonance with the general objectives of economic policy: it needs rationality, to be governed by a series of principles, as well as to pursue certain purposes.

This tax system, formed by a set of taxes, will be all the more systematized the greater the balance between that set and its adequacy to fiscal and extra-fiscal objectives, since it needs an integration among all its components".

Now, it was precisely the purposes and fiscal objectives, outlined and evidenced in the Report of the State Budget for 2007 that was established, in this segment, as an essential measure to fight against tax fraud and evasion, the creation of "a regime of joint and several responsibility of the substitute for the non-withheld tax to the beneficiaries of income in situations qualified as fraudulent practices related to the omission or reduction of the amount of remuneration paid whether by its non-accounting, whether by its characterization as income not subject to taxation (e.g., allowances") normativized by the introduction of No. 4 to Article 103 of CIRS.

From all that has been said, we do not discern that the regime of joint and several liability provided therein, and the interpretation made thereof, violates, collides with or offends the principle of coherence of the tax system in the same way that it does not contribute to any violation of the right to property or the principle of free private initiative and autonomy.

Concluding thus that it does not appear to us that contributive capacity, equality, proportionality, and coherence of the tax system are sacrificed at the altar of the regime of joint and several liability for payment of tax in the situations provided in No. 4 of Article 103 of CIRS, that is, before "income subject to withholding at source that has not been accounted for or communicated as such to the respective beneficiaries"

The Claimant further argues, in defense of its requests, the illegality of the inspection procedure, invoking for this purpose the violation of Articles 60 and Article 61 of the Complementary Tax Audit Procedure Regime (RCPIT), based on the fact that the Draft Tax Audit Report was drawn up on 25 November 2011 and sanctioned on 28 of the same month, whereas the "Diligence Note" was signed on 29 November 2011, thereby concluding under Article 144 of its request for arbitral pronouncement "that the "Diligence Note" was notified to the CLAIMANT already after the date of preparation and sanctioning of the Draft Audit Report, in violation of the provisions of Articles 60 and 61 of the Complementary Tax Audit Procedure Regime […]"

With regard to this segment, we are of the opinion that the Claimant has no grounds whatsoever since audit acts are considered concluded on the date of notification of the diligence note issued by the official in charge of the procedure, in accordance with the provision of No. 1 of Article 61 of RCPIT.

Being after such notification of the diligence notes, "forbidden the possibility of practice of new acts, no re-opening of the procedure being possible for the practice of further audit acts"[13], no prejudice having been suffered by the Claimant "by virtue of having been notified of the conclusion of the audit acts some days after having been notified for the exercise of the right of hearing within the scope of the audit procedure" as concluded by the AT in Article 47 of its response.

C. DECISION

In accordance with the foregoing, the members of this Arbitral Tribunal agree to:

a) judgment wholly dismissing the requests for annulment of the assessments, nos. 2011..., and nos. 2011... to 2011..., relating to withholdings at source of IRS and compensatory interest, relating to the 2008 fiscal year, as well as dismissing the request for declaration of nullity of the order rejecting the hierarchical appeal,

b) consider prejudicial the consideration and decision relating to the request for indemnification for guarantee improperly provided.

D. VALUE OF THE PROCEEDING

In accordance with the provisions of Article 306, Nos. 1 and 2 of the Code of Civil Procedure, approved by Law No. 47/2013, of 26 June, 97-A), No. 1, paragraph a) of the Tax Procedure and Process Code, and Article 3, No. 2 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceeding is fixed at €127,763.02.

E. COSTS

Pursuant to Articles 12 No. 2, 22 No. 4 of RJAT, and Articles 2 and 4 of the Regulation of Costs in Tax Arbitration Proceedings, and Table I attached thereto, the amount of costs is fixed at €3,060.00, to be borne by the Claimant.

NOTIFY

[Text prepared by computer, pursuant to the provision of Article 131 of the Code of Civil Procedure, applicable by reference to Article 29 No. 1 of the Legal Regime for Tax Arbitration, with blank lines and revised by the collective of arbitrators].

[The drafting of this decision follows the spelling prior to the Orthographic Agreement of 1990].

Lisbon, 30 October 2015

The Collective Arbitral Tribunal,

José Poças Falcão

(President)

José Coutinho Pires

(Member)

José Rodrigo de Castro

(Member)

[1] Subsequently revoked by Law No. 7/2009, of 12 September.

[2] See proceeding no. 704/2014-T of CAAD, already published.

[3] Now Articles 152 and 153 of Decree Law No. 4/2015, of 7 January

[4] Course of Administrative Law, Volume II, Almedina, pages 352 et seq.

[5] Notes on Tax Law (The Tax Legal Relationship), Edition of the University of Minho, 2009, pages 30 et seq.

[6] Susana Tavares da Silva, Tax Law, General Theory, University of Coimbra Press, 2013, pages 132 et seq.

[7] The taxation of income of individuals, in AAV, Tax Law Lessons, Volume I, 3rd edition, 2014, Almedina, pp 205 et seq.

[8] Different from the concept of tax capacity, as signal Diogo Leite de Campos and Mónica Horta Leite de Campos, Tax Law, Almedina, 1966, pp. 130 et seq.

[9] Jónatas E.M. Machado and Paulo Nogueira da Costa, Course of Tax Law, 2009, Coimbra Publisher, pages 42 et seq.

[10] Joaquim Freitas da Rocha, Lessons of Tax Procedure and Process, 3rd Edition, 2009, Coimbra Publisher, pp

[11] In the same sense Rui Duarte Morais, Manual of Tax Procedure and Process, Almedina, 2014, page 18.

[12] Repository School of Law, University of Minho (Master's Thesis), The principle of Coherence of National Tax Systems in the Jurisprudence of the Court of Justice of the European Union, 2012, pages 16 et seq.

[13] Joaquim Freitas da Rocha and João Damião Caldeira, Complementary Tax Audit Procedure Regime, Annotated and Commented, 2013, Coimbra Publisher, page 320-