IRS Withholding Tax: Joint Liability and Liquidation Challenged at CAAD (Process 119/2015-T)

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Sérgio de Matos and Magda Feliciano, designated by the Ethics Council of the Centre for Administrative Arbitration to form an Arbitral Tribunal, agree on the following

I – REPORT

On 20 February 2015, A… - …, S.A., a legal person bearing registration number …, with registered office at …, no. …., …., … ..., filed a request for the constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011 of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012 of 31 December (hereinafter, briefly designated LFATM), seeking the declaration of illegality of the acts of Personal Income Tax (Withholding at Source) assessment no. 2011 … and the corresponding Compensatory Interest no.s 2011 … to 2011 …, issued by reference to the year 2009, and, as well, against the decision dismissing the hierarchical appeal, notified by a Dispatch of the Assistant Director General for Taxation, of 24 October 2014.

To support its request the Applicant alleges, in summary, that the referred tax acts suffer from the following defects:

i. Defect of form due to lack of reasoning;

ii. Breach of legal formalities due to omission of the exercise of the right to prior hearing before issuing the assessments;

iii. The non-existence of the tax fact;

iv. The violation of various constitutional principles, namely:

a. the principle of contributive capacity;

b. the principle of tax equality;

c. the principle of proportionality in a broad sense;

d. the principle of coherence of the tax system;

v. The illegality of the inspection procedure;

vi. The illegality of the assessment of compensatory interest;

vii. Compensation for provision of undue guarantee;

viii. The illegality of the dispatch dismissing the hierarchical appeal.

On 23-02-2015, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.

The Applicant did not proceed to appoint an arbitrator, and therefore, pursuant to the provisions of paragraph a) of article 2, section 6 and paragraph a) of article 1, section 11 of the LFATM, the President of the Ethics Council of the CAAD designated the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the charge within the applicable deadline.

On 15-04-2015, the parties were notified of these designations, having manifested no intention to challenge any of them.

In accordance with the provisions of paragraph c) of article 1, section 11 of the LFATM, the collective Arbitral Tribunal was constituted on 04-05-2015.

On 03-06-2015, the Respondent, duly notified for this purpose, filed its answer defending itself solely by objection.

By petition filed on 06-08-2015, the Applicant requested the use, in the present proceedings, of the testimony given by witness B, in process 118/2015T of the CAAD.

Notified to pronounce itself in this regard, the Tax Authority raised no objection to the referred use.

Pursuant to the provisions of article 421 of the Code of Civil Procedure, applicable under the terms of article 29, section 1, paragraph e) of the LFATM, the requested use of the testimony of the above-referred witness, given in process 118/2015T of the CAAD, was granted.

Given that none of the purposes legally assigned to it were being met, pursuant to the provisions of articles 16, paragraph c), 19 and 29, section 2 of the LFATM, as well as the principles of procedural economy and prohibition of useless acts, the holding of the meeting referred to in article 18 of the LFATM was dispensed with.

Having been granted a deadline for the presentation of written submissions, these were presented by the parties, pronouncing themselves on the evidence produced and reiterating and developing their respective legal positions.

A deadline of 30 days was set for the issuance of the final decision, after the Tax Authority's submissions.

The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with the terms of articles 2, section 1, paragraph a), 5 and 6, section 1, of the LFATM.

The parties possess legal personality and capacity, are legitimate and are duly represented, in accordance with articles 4 and 10 of the LFATM and article 1 of Ordinance no. 112-A/2011 of 22 March.

The case does not suffer from nullities.

Thus, there is no obstacle to examining the merits of the case.

All considered, it is necessary to render

II. DECISION

A. MATTER OF FACT

A.1. Facts established as proven

1. The Applicant is a joint-stock company engaged in the activity of temporary assignment to using companies of workers that, for this purpose, the Applicant contracts and remunerate.

2. Within this scope, there exists a triangular labour relationship, between the Applicant, in its capacity as a temporary work company, the temporary worker with whom the Applicant enters into a temporary work contract, and the using company which, by means of a contract for use of the temporary worker that it enters into with the APPLICANT, employs the temporary worker under its authority and direction.

3. In the course of its activity, the Applicant entered into various temporary work contracts with temporary workers, in which the location where the workers in question would perform their respective functions was stipulated, and therein was also expressly provided for the payment of, in addition to base monthly remuneration, certain amounts as travelling allowances.

4. On 1 July 2011, an inspection action commenced in accordance with the terms contained in Service Order no. … 2011…, of general scope, covering the years 2008 and 2009.

5. The inspection action originated from the fact that the personnel costs shown in Annex A of the CIT Return were significantly higher than the values shown in Annex J, submitted by the taxpayer, plus the value of the contribution to Social Security, a burden of the taxpayer, and consequently to the total values declared by the various employees with income in Category A of PIT, paid in the years 2008 and 2009.

6. In the course of the inspection procedure in question, and as results from the inspection report, the tax authority understood to reclassify the amounts attributed to the Applicant's temporary workers as travelling allowances as dependent work income, Category A of PIT.

7. Thus, the Tax Inspection established and considered that:

a. There were recorded in the POC 64 sub-account - Personnel costs, sums paid as travelling allowances to employees, in the amount of €1,023,589.98 (2008), and €1,291,025.04 (2009), excluding those that were considered Category A PIT income;

b. With respect to dependent work income (Category A PIT), values of €1,235,549.68 (2008), and €1,863,780.49 (2009) were declared;

c. The total of travelling allowances not considered as Category A PIT income represented 83% in 2008, and 69% in 2009, of the total income that "A" considered as Category A income;

d. The labour contracts entered into by "A" with the temporary workers established the location of the temporary worker's work, a location that would correspond to the necessary work location provided for in D.L. no. 106/98 of 24 April, and D.L. no. 192/95 of 28 July, laws that governed the allowance of travelling allowances applied to Public Administration personnel;

e. In the service provision contracts entered into with its clients, the assigned workers were not identified, with a reference salary for each category of worker (all-inclusive) being established, as well as the hourly rate to be invoiced by "A" per category per worker assigned;

f. In the invoices issued to its clients, "A" did not mention the number of workers assigned, did not identify them, did not discriminate the values invoiced for service provision and for travelling allowances for each of them, with only a single item appearing on its invoices "Assignment of personnel for works at your project no. º ---", with an indication of the period to which the invoice related, and in the lower area of its invoices appears a stamp with the heading "Declaration" followed by the following text "For the purposes of the provision in paragraph f) of article 42 of the CICS, new wording given by section 1 of art. 30 of Law no. 87-8/98 of 31 December, we declare that the present invoice expressly includes Travelling Allowances in the amount of", with the amount of travelling allowances deemed to be included in the total invoiced being manually inserted in a space provided for this purpose;

g. "A" possessed monthly itinerary bulletins 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 compensation that gave rise to its attribution;

h. A large part of the referred travelling allowances aimed to compensate workers for transfers made by them to their residences, localities in which they contractually agreed to exercise their work activity, and therefore it was considered that these constituted effective remuneration in accordance with paragraph d) of section 3 of article 2 of the PIT Code, combined with D.L. no. 106/98 of 24 April, which should have been, at the time of their attribution, subject to withholding at source, with "A", in accordance with section 4 of article 103 of the PIT Code;

i. Compensation for travel in service only occurs if a given worker, of a given company, having a given work location, has to travel on business of the company to another location, not contractually fixed, to there, exceptionally, perform any task or function, and return thereafter to their contractually fixed work location, which is manifestly not the case;

j. Given that "A" and the workers knew that the work location would be at a location distinct from the worker's residence or even in a foreign country, by signing the labour contracts they had the opportunity to adjust the salary based on that circumstance, with the worker's residence, the registered office of the temporary work company or the registered office of the using company being irrelevant for this purpose, and therefore these were not expenses incurred in service of and for the benefit of the employer entity;

k. The referred sums were not susceptible to being considered travelling allowances, but rather constituted actual work remuneration subject to PIT;

l. The labour contracts entered into in the years 2008 and 2009 were analysed, and the work location established in each of them was extracted therefrom, a location that would correspond to the usual work location as defined in D.L. no. 106/98 of 24 April, and D.L. no. 192/95 of 28 July, afterwards the itinerary bulletins of all workers who received amounts as "travelling allowances" were analysed, verifying which corresponded to days of transfers to the work location established in the contracts, and which corresponded to days of transfers to locations distinct from the location established in the contracts, an analysis that was carried out with the technical director of "A";

m. There were further considered, by subtracting from the value of taxable travelling allowances, resulting from this analysis, the days of meal subsidy corresponding to the days on which, under the legal terms, the compensations paid as "travelling allowances" were considered Category A income, with corrections resulting in a total value of €112,868.00 (2008), and €173,420.00 (2009).

1. Consequently, and with respect to the year 2009, the tax authority considered that there was a shortfall in PIT, not withheld at source by the Applicant, in the amount of €173,420.00.

2. On 13-12-2011, Applicant exercised the Right to Hearing within the scope of the inspection procedure.

3. The Applicant was notified, on 3 January 2012, of the acts of Personal Income Tax assessment (Withholding at Source) no. 2011 … and the corresponding Compensatory Interest no.s 2011 … to 2011 …, issued by reference to the year 2009.

4. The Applicant filed a request for administrative review and, following its dismissal, the corresponding hierarchical appeal, petitioning for the annulment of the referred tax acts.

5. By Official Letter no. …, dated 24 November 2014, sent by fax received on 25 November 2014, the Applicant was notified of the Dispatch of the Assistant Director General for Taxation, of 24 October 2014, which determined the dismissal of the hierarchical appeal filed.

6. As the amount underlying the notified assessments was not paid within the voluntary payment deadline set for this purpose, the Finance Service of ... - … instituted the competent enforcement proceedings no. …2012…, with a view to the compulsory collection of the tax debt and compensatory interest, in the total amount of €190,472.62.

7. Following notification of the value of the suitable guarantee to be provided for purposes of suspension of the referred enforcement proceedings, the Applicant provided bank guarantee no. …, issued by Banco Espírito Santo, on 29 March 2012, in the amount of €241,139.00.

A.2. Facts established as not proven

With relevance to the decision, there are no facts that should be considered as not proven.

A.3. Reasoning of the proven and not proven matter of fact

Regarding the matter of fact the Tribunal does not have to pronounce itself on everything that was alleged by the parties, it being incumbent upon it, rather, to select the facts that matter for the decision and to distinguish the proven from the not proven matters (cf. article 123, section 2, of the CPPT and article 607, section 3 of the CPC, applicable ex vi article 29, section 1, paragraphs a) and e), of the LFATM).

In this manner, the relevant facts for the judgment of the case are chosen and defined in function of their legal relevance, which is established in light of the various plausible solutions of the question(s) of Law (cf. former article 511, section 1, of the CPC, corresponding to the current article 596, applicable ex vi article 29, section 1, paragraph e), of the LFATM).

Thus, having regard to the positions assumed by the parties, in light of article 110, section 7 of the CPPT, the documentary evidence and the procedural file attached to the case, the facts listed above were considered proven, with relevance to the decision.

No facts were established as proven or not proven relating to points 59, 85, 87, 89, 90, 101 and 102 of the Initial Request of the Applicant, inasmuch as they contain strictly conclusive matter, to be validated or not, in light of the interpretation of the applicable legal framework, to the extent that it has relevance to the resolution of the case.

B. ON THE LAW

As already referred to above, the Applicant raises the following order of questions:

i. Defect of form due to lack of reasoning;

ii. Breach of legal formalities due to omission of the exercise of the right to prior hearing before issuing the assessments;

iii. The non-existence of the tax fact;

iv. The violation of various constitutional principles, namely:

a. the principle of contributive capacity;

b. the principle of tax equality;

c. the principle of proportionality in a broad sense;

d. the principle of coherence of the tax system;

v. The illegality of the inspection procedure;

vi. The illegality of the assessment of compensatory interest;

vii. Compensation for provision of undue guarantee;

viii. The illegality of the dispatch dismissing the hierarchical appeal.

Having raised no defects leading to the nullity or non-existence of the disputed acts, the Tribunal will follow the order indicated by the Applicant, in accordance with article 124, section 2, paragraph b) of the CPPT.

Let us then examine them.

i. On the lack of reasoning

In this regard, the Applicant alleges, in sum, that "the tax act that is the subject of the present request for arbitral pronouncement contains no reference, express or implicit, to the Report of the Tax Inspection, or to any other concrete document to which it clearly and expressly refers, and therefore, as the required legal reasoning does not appear in the act itself - namely, the demonstration of the presuppositions on which the assessment depends - neither can it be understood, in the case in question, that this has been fulfilled by reference to any other document that is not identified therein".

Thus, concludes the Applicant, "the tax assessment and compensatory interest acts now contested were issued in violation of the applicable legal norms and principles, in particular article 268, section 3, of the Constitution of the Portuguese Republic and article 77 of the General Tax Law, and should be annulled accordingly."

As is known, and both parties recognize it, reasoning is a requirement of tax acts in general, being a constitutional imposition (article 268 of the CRP) and legal (article 77 of the GTL).

In brief, it can be said that it is now settled in national doctrine and jurisprudence that the required reasoning must meet the following characteristics:

1. Officiousprocedure: must always proceed from the initiative of the administration, not being admissible reasoning at the request;

2. Contemporaneity: must be contemporaneous with the performance of the act, no deferred reasoning being permitted;

3. Clarity: must be comprehensible by an average addressee, avoiding polysemous or deeply technical concepts;

4. Completeness: must contain all the essential elements and those that were determinative of the decision taken. This characteristic unfolds into two requirements, namely: the duty of justification (legal norms and factuality – domain of legality) and motivation (domain of discretion or opportunity, when a valuation is necessary).

Now, if reasoning is, in the referred terms, necessary and mandatory, this cannot and should not be understood in an abstract and/or absolute manner, that is, the reasoning required of a concrete tax act must be that which is functionally necessary for it not to present itself to the taxpayer as a pure demonstration of arbitrariness. This will be – it is believed – the touchstone of compliance with the duty of reasoning: when, before an average addressee placed in the position of the actual addressee, the tax act presents itself, from a standpoint of reasonableness, as a product of pure arbitrariness of the Administration, because the reasons of fact and/or law on which it is based are not discernible, the act will suffer from lack of reasoning.

Article 77, section 1 of the GTL therefore states: "The decision of the procedure is always reasoned by means of a brief exposition of the reasons of fact and law that motivated it, and the reasoning may consist of a mere declaration of agreement with the grounds of previous opinions, information or proposals, including those that form part of the tax inspection report."

Parallelly, article 66, section 2 of the PIT Code provides that "The reasoning must be expressed through an exposition, though brief, of the reasons of fact and law of the decision, the lack of reasoning being equivalent to the adoption of grounds that, due to obscurity, contradiction or insufficiency, do not concretely clarify its motivation."

Descending to the concrete case, it is verified that the assessment acts in question occurred as a result of an inspection act and in accordance with the inspection report of the tax authority approved by dispatch, a report where the grounds for the assessments in question appear, which the Applicant, since the administrative review, demonstrated to understand, taking, in a reasoned manner, the decision not to accept.

Moreover, the Applicant itself ends up conceding to this very point – at least implicitly – by sustaining, also since the administrative review, that the reference to the inspection report should be explicit.

However, this understanding is, from the outset, contradicted by the Supreme Administrative Court Decision of 19-05-2004, issued in process 0228/03[1], cited by the Applicant itself, where it is stated that "Motivation presented after the performance of the act does not count as reasoning, nor does that contained in instructional documents previous to which no express or implicit reference has been made," thereby admitting that the reference may be implicit, that is, arising from the context of the tax act itself, or from which it emerges.

In this same sense, the jurisprudence of the Supreme Administrative Court is oriented, which considers that "Despite the lack of express indication of the applicable legal provision, the required legal reasoning of the tax act will be sufficient with reference to the relevant legal principles, the applicable legal regime or a determined normative framework, provided that, in any case, one can conclude that these were known or cognizable by a normal addressee placed in the concrete position of the real addressee."[2]

In this manner, it is understood that, considering the concrete context in which the assessment acts in question in the present case were produced, it will be perceptible, for an average addressee placed in the position of the actual addressee, that the grounds of those are those contained in the inspection report that preceded them, and it is certain that it is more evident that the Applicant understood this itself.

This, moreover, has been the judgment of our superior courts in analogous cases, and in this respect reference can be made to the Supreme Administrative Court Decisions of 10-09-2014, issued in process 01226/13[3], of the Northern Administrative Court of Appeals of 13-09-2012, issued in process 00334/05.8BEBRG[4], and of the Southern Administrative Court of Appeals of 23-05-2006, issued in process 01156/06[5] (cited by the Tax Authority).

Thus, and in this manner, there is nothing to censure, from the perspective of the duty of reasoning, in the tax acts that are the subject of the present case.

ii. On the duty of prior hearing

As regards this matter, the Applicant alleges, in sum, that it was not "notified in accordance with the terms provided in paragraph a), section 1, of article 60 of the General Tax Law".

However, as is evident from the facts established as proven, the fact is that the Applicant was notified to exercise its right to prior hearing, which it did, within the scope of the inspection procedure from which the assessments against which it is objecting resulted.

In this manner, and having regard to the provisions of article 60, section 3 of the GTL, the hearing of the Applicant before the assessment was dispensed with, and therefore this defect should also be considered as not verified.

iii. On the non-existence of the tax fact

The Applicant alleges, in this regard, that "the tax authority sustained the issuance of the assessment above identified, stating that the substitute – as the sole holder and beneficiary of the income in question – should not be taxed in its personal tax sphere, by means of an official assessment in this regard", and that "with the assessment having been issued and notified to the APPLICANT, as happened in the case in question, the tax authority sought to convert the substitute into the substituted, as if the former were the actual holder or beneficiary of the income that it sought to tax additionally".

The Applicant concludes that "the assessment now contested should have been notified not to the APPLICANT (substitute), as actually happened, but to each of the workers (substituted), in their capacity as tax subject and original responsible party for the payment of the tax not withheld," and that "Being the substituted the true holder of the income subject to taxation, more specifically of the sums now reclassified by the tax authority as dependent work income, it is their tax situation that needs correction, the assessment of the missing tax being directed to them", therefore, "Issuing and notifying the tax assessment to the APPLICANT, as happened in the case in question, means converting the substitute into the substituted, as if they were holder or beneficiary of the income that one intends to tax."

As referred to in the opinion attached to the case by the Applicant, tax solidarity is an institution "imported" from private law, more specifically from civil law, whose specificities in tax law are little studied by doctrine and do not have their own legal regime to support them", and the jurisprudential treatment of the institute in question is also scarce.

In this framework, the interpreter will have to, in light of the legal criteria that guide it, make a special effort to concatenate the various relevant normative provisions, in order to be able to sustain conclusions capable of clarifying the legal contours of the legal regime in question.

Under the terms of the GTL, we can distinguish two types of tax solidarity, with their own specificities sufficient to justify distinct treatments between both.

Thus, and on one hand, we have the solidarity that occurs "when the presuppositions of the tax fact are verified in relation to more than one person", designated, by article 21 of the GTL, as "passive solidarity", and which could equally be designated as "original", inasmuch as there exists a direct connection of the parties in solidarity with the fact generating the tax obligation.

On the other hand, another type of solidarity is detected in the GTL, which could, in light of its systematics, be qualified as "non-original", and which refers to the liability of third parties for the tax debt of the original tax subject, as generically provided in article 22, section 2 of that Law. Here, contrary to the original solidarity to which article 21 refers, "the presuppositions of the tax fact" are not verified in relation to the party in solidarity, since this one is not – by definition – an original tax subject.

That this type of cases – of article 22, section 2 of the GTL – is distinct from the first – to which article 21 of the same Law refers – will leave no doubt, since in that latter situation, in which "the presuppositions of the tax fact are verified in relation to more than one person", all the parties in solidarity will be original tax subjects of the tax, inasmuch as, precisely, the presuppositions of the tax fact are verified in relation to all of them, whereas in the hypothesis to which article 22, section 2 of the GTL refers, avowedly, there are involved third parties, other than the original tax subject of the tax.

That is: in cases in which "the presuppositions of the tax fact are verified in relation to more than one person", such as, for example, in the taxation of the family unit in Personal Income Tax, we will have a situation of original tax solidarity; in cases in which "the presuppositions of the tax fact" are not verified in relation to the party in solidarity, but which, by force of law, that one is solidarily liable for the tax debt, and possible accessories, of the original debtor – as happens in the case of managers of assets or rights of non-residents – we will have a situation of non-original tax solidarity.

The analysis of the distinction between those two types of tax solidarity resulting from the GTL need not be started from zero, since civil law doctrine, which has long studied this matter, has already detected the communion of purpose of solidarity obligations, as an incontrovertible given to be taken into account in the matter, and is even held, inclusively, as a presupposition of genuine solidarity[6].

These are cases that have as their object the same obligation and in which the creditor is recognized the faculty of demanding from any of the debtors the complete performance, but which escape the rule regime of solidarity.

Examples of this type of situation are the case of the worker run over in service, who may demand compensation either from the person who ran them over or from the employer; the case of the merchant robbed, who may demand reparation of the loss either from the thief or from the security guard who neglected their surveillance duties; or the case of the victim of fire, who may demand reparation of the loss either from the arsonist or from the insurance company that previously contracted to cover that risk.

A characteristic note of these situations is that the performance of the obligation before the creditor by one of the debtors, in certain cases extinguishes the responsibility of the rest, while in others it does not. Thus, if, in the above examples, the person who ran them over, the thief or the arsonist repair the damages, the employer, the security guard or the insurance company, respectively, will be exonerated of any obligation; whereas if it is these latter who satisfy, before the creditor, the obligation that falls to them, the obligation of the rest will remain, they responding for the totality of the obligation, before the debtor who performed before the creditor[7].

As the illustrious Master Antunes Varela concludes[8], "when, in the intention of the parties or in the spirit of the law, there exists communion of purpose uniting the obligations, that is, collaboration of the debtors in service of the same interest of the creditor, there is solidarity; when, on the contrary, there is no communion of purpose, but merely coincidence of purposes of the obligations, based on a disjunction or successive gradation of the obligations, solidarity is lacking (there being only a plurality of independent obligations, intended to satisfy the same interest of the creditor), although some provisions of solidarity obligations may be applied, by analogy, to the legal treatment of such situations."

Returning to the field of tax law, and applying here the doctrine that has just been referred to, one will conclude that in the situations that above were designated as original solidarity, we will be dealing with cases of true communion of purpose, founded on the communion of the tax fact itself, justifying the direct application of the civil provisions relating to solidarity.

Already in the situations that above were designated as non-original solidarity, what will be verified is the referred coincidence of purposes, as, returning to the example of managers of assets or rights of non-residents, arises from the circumstance that the performance of the obligation by the original tax subject (non-resident, in the example) exonerates the party in solidarity (manager, in the same example), whereas the performance by the party in solidarity (manager), will not exonerate the original tax subject from their obligation (which will persist, now, before that one, by way of the right of recourse), which may justify the application, by way of analogy, of the parts of the general regime of solidarity, to the extent that this is justified.

One can thus conclude, in light of the positive legal framework, with sufficient certainty, that the differences between the two types of tax solidarity detected, related essentially to the circumstances of:

• in one of them (article 21 of the GTL) there being a communion in the tax fact between the debtors (who, as such, will assume the quality of original tax subjects of the tax), with the consequent existence of a relational nexus between them, in terms of the performance of the tax obligation by any of them, generating the right of recourse of the performer against the rest;

• whereas in another (article 22, section 2 of the GTL), the tax fact is verified only as to one debtor (or, academically, as to a group of debtors), who assumes themselves as original tax subject, and therefore, the latter performing the tax obligation, no right will accrue to them against the rest, who, for their part, performing, may demand of the original debtor(s) the payment of what they were obliged to pay.

are justifications for a distinct treatment, to the extent that the verified differences justify it.

Descending, then to the concrete situation in question in the case, it is verified that what is at issue is the application of article 103, section 4 of the PIT Code in force at the date of the tax fact (year 2009), which provided that:

"Where income subject to withholding has not been recorded or communicated as such to the respective beneficiaries, the substitute assumes solidarity liability for the tax not withheld."

As will peacefully result, it is believed, from the hypothesis to which the said normative applies, what is at issue will be one of those cases that is reconducted to the provision of article 22, section 2 of the GTL, that is, in which, on one hand, the presuppositions of the tax fact are not verified in relation to the substitute (party in solidarity), and in which, on the other, the payment of the tax by the original tax subject, will exonerate the party in solidarity from any liability as regards this.

We are here, therefore, before a case in which the holder of the income subject to PIT, and substituted, is the original responsible party (in consonance with the first part of article 28, section 2, of the GTL) and in which the tax liability (cf. article 22, sections 1 and 2 of the GTL) of the substitute is, not subsidiary, as per the rule of article 22, section 4 of the GTL, reiterated in the second part of section 2 of article 28 of the GTL, but solidary.

Applying to the concrete case what has been set out above, it is understood that, in the concrete case, in the first place, the procedure of assessment and, above all, the consequent act of assessment, should have been directed (at least also) against the original responsible party – the substituted, holders of the income subject to tax – and not uniquely against the party in solidarity. Indeed, there being no situation here covered by article 21, section 1 of the GTL, that is, in which "the presuppositions of the tax fact are verified in relation to" the party in solidarity, there does not exist, in the sphere of this one, a tax fact, and therefore the assessment must be made in the sphere of the original tax subject, in accordance with the specific norms of the tax in question (in this case, PIT), and even though with the participation in the respective procedure (of assessment) of the party in solidarity, under the provisions of article 9, section 2 of the CPPT.

Thus, and as results from the reading of the norm of article 103, section 4 of the PIT Code, in question, the substitute is held liable solidarily for the tax not withheld and not for the amounts not withheld. Indeed, one cannot – and the legislator does not – confuse tax with amounts withheld on account of it[9].

Indeed, as was also written in the recent Supreme Administrative Court Decision of 23-09-2015, issued in process 0997/15:

"The personal income tax is a tax which, as its denomination indicates, is owed by natural persons, being levied on the annual value of income earned by them over the course of the year, article 1 of the Personal Income Tax Code.

Withholding at source is not a tax, but a collection mechanism, instituted by the Portuguese tax system with the objective of increasing the effectiveness in the collection of the tax (PIT). Through the use of such a mechanism, the State receives, monthly, on account of the tax that will be owed at the end of each year by employees or workers providing services and who are not covered by the exemption regime, a part of the personal income tax that is due by them.

For the tax subject of personal income tax this is an anticipated payment of the tax that is owed at the end of each year. For the entity that carries out its withholding this is a tax liability and not the payment of personal income tax. This merely proceeds to the discount from the salary of the worker of the amount that the state is to receive in the taxation of personal income tax of that worker, being incumbent upon it to deliver that value to the state. The same occurs when the entity to which a service was rendered withholds from the cost of the service that it should pay to the service provider, and which for them would be income taxable under personal income tax, the value corresponding to personal income tax.

But the company that carries out withholding at source does not thereby become taxed under personal income tax. It collects the values of personal income tax that are owed by the workers/service providers that it must deliver to the state treasuries."

Thus, in the present situation there will be no doubt that the substitute may be held liable solidarily for the tax, which is what the law refers to, and not already for the amounts not withheld.

Now, the tax, in this case, is only defined (only becomes liquid, certain and exigible) after the assessment carried out, in accordance with the PIT Code, to the respective tax subjects. Only there will it be determined, in accordance with the legal terms, the quantum of tax legitimately exigible by the tax creditor, and only there, precisely, will be determinable the extent of the liability of the negligent substitute, by comparing the value of the amounts whose withholding was illegally omitted, with the value of the tax owed, if any, restricting said liability to the lesser of the two values.

That is: it is understood that the liability arising from the norm of article 103, section 4 of the applicable PIT Code, duly interpreted in the systematic context in which it is inserted, enshrines the solidarity liability of the substitute for the tax not withheld (and not for the amounts not withheld), thereby resulting that it becomes necessary, in the first place, to determine the quantum thereof, and only thereafter the value of the withholding owed.

Thus, and concretizing, if there is a withholding shortfall of 100, and, the tax being assessed in accordance with the PIT Code, it results, for example:

• the existence of a tax to be paid of 120, the substitute will be solidarily liable for 100;

• the existence of a tax to be paid of 60, the substitute will be solidarily liable for 60, notwithstanding the amounts not withheld amounting to 100;

• the non-existence of tax to be paid (or even a refund), the solidarity liability of the substitute will be null, notwithstanding the amounts not withheld amounting to 100.

The sole – and fundamental – difference introduced by the norm of article 103, section 4 of the applicable PIT Code, now in question, is the alteration of the type of tax liability of the substitute, from the rule regime of subsidiary liability (arising from the general rule of article 22, section 4 of the GTL, and specific to article 28, section 2 of the same Law), to the exceptional regime of solidarity liability, and not an alteration of the object of that same tax liability.

That is: article 103, section 4 of the PIT Code, in question, alters the type of tax liability, but not its object, which ceases not to be the tax, to become the amount not withheld.

Therefore, and in sum, in the case of article 103, section 4 of the PIT Code, under analysis, the substitute does not become liable for anything different from what they already were, in accordance with article 28, section 2 of the GTL, only the degree of liability varying, for so to speak, the same object.

All this, well it will be understood, if one considers the specific rules of the calculation of the tax owed under Personal Income Tax, and the circumstance that its normal functioning may, with facility, generate situations in which the tax owed by the original tax subject, is null or, if not null, less than the withholding owed. Hence, only the PIT owed by the original tax subject(s), duly assessed, and contrasted with this the amount of the sums whose withholding was owed, will it be possible to determine the extent of the solidarity liability of the substitute, under penalty of being able to generate situations of unjustified enrichment for the Public Treasury[10].

It is thus concluded, with the Applicant, that the Tax Authority, in the tax acts in crisis, converted "the substitute into the substituted, as if they were holder or beneficiary of the income that one intends to tax."

Indeed, with respect to the Applicant no tax fact subject to PIT was verified. The latter is liable, on a solidarity basis, for the tax owed by its workers, to whom they will have illegally omitted, withholdings at source, up to the value of the withholdings omitted. But it was not that (the PIT of the original tax subjects) the tax that was assessed in the tax acts in crisis.

In this manner, given the alleged non-existence of a tax fact underlying the assessments that are the subject of the present arbitral action, and having regard to the fact that "as this Supreme Administrative Court has affirmed, with no tax fact existing (...), the presupposition of the tax is not verified"[11] (in this case, article 1 of the PIT Code).

As the defect in question is a defect of violation of law, and there being no legal norm that strikes it with nullity, the assessments that are the subject of the present arbitral action should then be annulled.

This decision contends in no way with the various objections raised by the Tax Authority in its answer.

Indeed, the Tax Authority alleges that "As these are solidarity obligations, the creditor may demand payment of the totality of the debt from only one of the debtors" (article 67 of the answer), that "there is no norm that establishes, in cases of solidarity obligations, the order in which the creditor must demand the amount in debt" (article 69 of the answer), and that "the party in solidarity is a co-debtor in solidarity who, by force of law, is in equality of circumstances with the original responsible party, which implies that both may be sued simultaneously, or either one indistinctly, as to the performance of the tax obligation".

Being all that the Respondent affirms true, the fact is that one is here at a prior moment, which is that of the determination (assessment) of the obligation itself. Now, as has been said, the Applicant will be solidarily liable, yes, and may be sued in the first line, but for the tax debts of each one of the workers, which it illegally did not withhold, and not for the amounts that it itself did not withhold, which will serve, solely, as a limit to that liability, and which was that (the fact) on which, illegally, it is believed, as was seen, tax was assessed, in the tax acts in crisis.

That is, the Tax Authority could, indeed demand the Applicant without demanding the original tax subjects, but provided that, previously, the quantum of its liability was determined, duly assessing the tax owed by those, which did not occur.

Thus, and in light of all that has been exposed, the arbitral petition should proceed, making moot the consideration of the remaining questions raised.

The Applicant further formulates a claim for compensation for undue guarantee.

This matter has been the subject of various decisions within the scope of arbitral jurisdiction, and can be seen, among others, that of the CAAD arbitral process, no. 1/2013T[12], in terms that are now transcribed

"In accordance with the provisions of paragraph b) of article 24 of the LFATM, the arbitral decision on the merits of the claim for which no appeal or challenge may be brought binds the tax authority from the end of the deadline for appeal or challenge, with the latter, in the exact terms of the decision in favor of the tax subject and up to the end of the deadline for spontaneous execution of judicial tax court sentences, 'restoring the situation that would have existed if the tax act that is the subject of the arbitral decision had not been issued, adopting the acts and operations necessary for this purpose'.

In the legislative authorization on which the Government based itself to approve the LFATM, granted by article 124 of Law no. 3-B/2010 of 28 April, there is proclaimed, as a primary guideline of the institution of arbitration as an alternative form of jurisdictional resolution of conflicts in tax matters, that 'the tax arbitral process should constitute an alternative procedural means to the judicial challenge process and to the action for recognition of a right or legitimate interest in tax matters'.

Although article 2, section 1, paragraphs a) and b), of the LFATM uses the expression 'declaration of illegality' to define the competence of the arbitral tribunals that function in the CAAD and makes no reference to constitutive (annulling) and condemnatory decisions, it should be understood, in harmony with the referred legislative authorization, that the powers that in a judicial challenge process are attributed to the tax courts in relation to the acts whose appraisal of legality falls within their competence are included in its competence.

Although the judicial challenge process is essentially a mere annulment process (articles 99 and 124 of the CPPT), a condemnation of the tax authority may be rendered in the payment of compensatory interest and compensation for undue guarantee.

In truth, although there is no express norm to this effect, it has been peacefully understood in the tax courts, since the entry into force of the codes of the 1958-1965 tax reform, that a claim for condemnation in the payment of compensatory interest may be cumulated in a judicial challenge process with the claim for annulment or declaration of nullity or non-existence of the act, because in these codes it is referred that the right to compensatory interest arises when, in administrative review or judicial process, the administration is convinced that there was an error of fact attributable to the services. This regime was, subsequently, generalized in the Code of Tax Procedure, which established in section 1 of its article 24 that 'there shall be a right to compensatory interest in favor of the taxpayer when, in administrative review or judicial process, it is determined that there was an error attributable to the services', later, in the GTL, in whose article 43, section 1, it is established that 'compensatory interest is due when it is determined, in administrative review or judicial challenge, that there was an error attributable to the services resulting in payment of the tax debt in an amount higher than legally owed' and, finally, in the CPPT in which it was established, in section 2 of article 61 (to which corresponds section 4 in the wording given by Law no. 55-A/2010 of 31 December), that 'if the decision recognizing the right to compensatory interest is judicial, the payment deadline counts from the beginning of the spontaneous execution deadline'.

With respect to the claim for condemnation in the payment of compensation for provision of undue guarantee, article 171 of the CPPT establishes that 'compensation in the case of a bank guarantee or equivalent unduly provided shall be claimed in the process in which the legality of the executed debt is disputed' and that 'compensation must be claimed in administrative review, challenge or appeal or if its ground is subsequent within 30 days of its occurrence'.

Thus, it is unequivocal that the judicial challenge process encompasses the possibility of condemnation in the payment of compensation for undue guarantee and is, in principle, the appropriate procedural means to formulate such a claim, which is justified by evident reasons of procedural economy, since the right to compensation for undue guarantee depends on what is decided on the legality or illegality of the assessment act.

The filing of a request for constitution of an arbitral tribunal has the corollary that it is in the arbitral process that the 'legality of the executed debt' will be discussed, and therefore, as results from the express tenor of that section 1 of the referred article 171 of the CPPT, the arbitral process is also the appropriate means for considering the claim for compensation for undue guarantee.

Moreover, the cumulation of claims relating to the same tax act is implicitly presupposed in article 3 of the LFATM, when it speaks of 'cumulation of claims even though relating to different acts', which makes clear that the cumulation of claims is also possible in relation to the same tax act and claims for compensatory interest and condemnation for undue guarantee are susceptible to being covered by that formula, and therefore an interpretation in this sense has, at least, the minimum verbal correspondence required by section 2 of article 9 of the Civil Code.

The regime of the right to compensation for provision of undue guarantee is contained in article 52 of the GTL, which establishes the following:

Article 53

Guarantee in case of undue provision

1. The debtor who, to suspend execution, offers a bank guarantee or equivalent shall be compensated in whole or in part for the damages resulting from its provision, should they have maintained it for a period exceeding three years in proportion to the outcome in administrative appeal, challenge or opposition to execution that have as their object the guaranteed debt.

2. The deadline referred to in the preceding section does not apply when it is verified, in administrative review or judicial challenge, that there was an error attributable to the services in the assessment of the tax.

3. The compensation referred to in section 1 has as its maximum limit the amount resulting from the application to the guaranteed value of the rate of compensatory interest provided for in the present law and may be claimed in the very process of administrative review or judicial challenge, or autonomously.

4. Compensation for provision of undue guarantee shall be paid by deduction from the tax revenue of the year in which the payment was made."

In the case in question, it is manifest that the error of the assessment act embodied in the assessments issued without support in a tax fact that is a presupposition of the tax, is attributable to the Tax Authority and Customs Authority, since the tax inspection and the assessment were of its initiative and the Applicant in no way contributed to that error being issued.

Therefore, the Applicant has the right to compensation for the guarantee provided.

However, no charges incurred by the Applicants to provide the bank guarantee were alleged and proven, and therefore it is not possible to fix here the compensation to which the Applicants are entitled, which may only be done in execution of this decision.

C. DECISION

Therefore, this Arbitral Tribunal decides to render fully justified the arbitral petition filed and, in consequence,

a) Annul the tax acts that are the subject of the present case;

b) Condemn the Tax Authority to pay the Applicant compensation for undue guarantee, in the amount to be determined in execution of sentence; and

c) Condemn the Tax Authority for the costs of the case, in the amount of €3,672.00.

D. Value of the Case

The value of the case is fixed at €190,472.62, in accordance with article 97-A, section 1, paragraph a), of the Code of Tax Procedure and Process, applicable by virtue of paragraphs a) and b) of section 1 of article 29 of the LFATM and section 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is fixed at €3,672.00, in accordance with Table I of the Regulation of Costs of Tax Arbitration Proceedings, to be paid by the Respondent, as the petition was fully justified, in accordance with articles 12, section 2, and 22, section 4, both of the LFATM, and article 4, section 4, of the cited Regulation.

Let it be notified.

Lisbon

26 October 2015

The Presiding Arbitrator

(José Pedro Carvalho - Relator)

The Arbitrator Member

(Sérgio de Matos)

The Arbitrator Member

(Magda Feliciano)

[1] Available for consultation at www.dgsi.pt, as with the remaining jurisprudence cited without mention of source.

[2] Cf., e.g., Supreme Administrative Court Decision of 08-06-2011, issued in process 068/11.

[3] "the assessment acts in question occurred as a result of an inspection act and in accordance with the inspection report of the tax authority approved by dispatch. A report showing that these acts derive from arithmetic corrections introduced through the disregard of VAT regularizations carried out by the taxpayer (now appellant) in various periodic declarations duly identified, and that arise from various credit notes that it produced in the years 2002 and 2003."

[4] "Indeed, if we look at the inspection report that underlies the additional assessment impugned, whose tenor was given as reproduced in the factual basis, we can conclude that the Tax Authority made known to the party, here the Appellant, the reasons that led it to proceed with the additional assessment impugned."

[5] "it is clear that if the challenger analyzes the content of the assessment together with the inspection report of the tax authority, of which it also has knowledge, the reasoning of the tax act is crystal clear, without ambiguities, obscurities, or any contradiction."

[6] In this regard, cf. João de Matos Antunes Varela, "Of Obligations in General", vol. I, 7th Ed., Almedina, 1991, pp. 758 et seq., which is followed closely, in free citation.

[7] It should not be confused this type of situation with others, also identified by the same A. (op. cit., p. 778), in which it may "happen that whoever performs has the right to collect themselves in full from one or some of the co-debtors". Indeed, and without excessively prolonging the discussion, as it is a doctrinal matter, collateral to the matter in question in the case, in the situations pointed out, the total responsibility within one (or a group) debtor in relation to the rest, exists from the outset and in the abstract, not being eventual or conditioned (generally, in the measure of culpas). Hence that in this type of situations, the same A. (op. cit., p. 777, note 2), speak, not of the right of recourse, but of the right of compensation.

[8] Op. cit., p. 761.

[9] Being sufficiently illuminating, in this regard, article 28 of the GTL, where it is referred, in section 1 that "the entity obliged to withhold is liable for the amounts withheld and not delivered to the State coffers", and not, precisely, for the tax withheld and not delivered, whereas in section 2, one already speaks of "tax not withheld".

[10] Which is easily configurable: imagine a situation in which, if the amounts had been properly withheld by the substitute, the original tax subject would have the right to a refund, because the withholdings exceeded the tax owed. Assessing and collecting the amounts not withheld (and not the tax), as the Tax Authority did in the case, it removes itself from the refund to the original tax subject, to the detriment of the substitute.

[11] Cf. Supreme Administrative Court Decision of 22-04-2015, p. 0826/13.

[12] Available at www.caad.org.pt.