CAAD 128/2017-T: Prohibition of Repeated External Tax Inspection Under Article 63(4) LGT - IRC Assessment Annulled

Arbitration Decision

Parties

Claimant: A…, LDA., Tax ID No…, with registered office at …, P.O. Box …, …-…, …;

Respondent: TAX AND CUSTOMS AUTHORITY (AT)

I. REPORT

a) On 20 February 2017, the Claimant filed with the CAAD a request for arbitral pronouncement (PPA), requesting, under the Legal Framework for Arbitration in Tax Matters (RJAT), the constitution of a single arbitral tribunal (TAS).

THE REQUEST

b) The Claimant requests a declaration of illegality of the tax acts comprising: additional assessment of Corporate Income Tax (IRC) No. 2016…, relating to the year 2011, in the amount of €31,696.62 and assessment of compensatory interest in the amount of €4,536.52, for a total of €36,233.14.

c) It further petitions that "once revoked — as is necessary — the assessment acts that are the subject matter of this Request for Arbitral Pronouncement, the amounts unduly paid should be refunded to the Claimant, plus indemnification interest calculated at the legal rate, in accordance with Article 43, No. 1, of the General Tax Law (LGT), calculated from the date of such payment until full reimbursement".

THE CAUSE OF ACTION

d) The Claimant was subject to an external inspection action, which resulted in the additional IRC assessment and compensatory interest indicated above, and it filed a petition for administrative reconsideration, whose rejection was notified to it on 5 December 2016, as it did not agree with the content of the Final Inspection Report.

e) External inspection procedure that was conducted under Service Order No. 012013…, dated 11 February 2013, for the fiscal year 2011.

f) It contends that the assessments thus issued are defective due to errors in both factual and legal grounds.

g) First, because it considers there was a "violation of the provision of Article 63, No. 4, of the LGT, prohibition on repetition of external inspection procedures, insofar as more than one external inspection procedure was carried out with respect to the same taxpayer, tax, and tax period",

h) Since "… the … Claimant was also notified of a prior inspection action, under Dispatch No. D12012…, dated 14 January 2013, with the objective of 'consultation, collection and cross-referencing of elements', for the fiscal years 2011 and 2012"

i) Second, because "… the Tax Authority ignored credit notes Nos. FA… and FA… issued in relation to invoices numbered 42 and 43", relating to wine that "… never entered inventory, because it never left the sphere of company B…, as is evident from the aforementioned credit notes issued, respectively, for the amounts of €63,972.01 and €38,546.71", and it is certain that the fact that "… the aforementioned wines never entered the Claimant's inventory is due exclusively to the fact that they never left the sphere of company B…".

j) And because "… since there is no evidence in any accounting records of the company — and therefore in the factual truth — of the existence of a sale, as well as its respective value, the AT illegally resorted to the use of indirect methods to determine the taxable income".

k) Concluding that the Claimant "... did not violate the provisions of subsection b) of No. 3 of Article 17 of the Corporate Income Tax Code, inasmuch as the accounting records reflect all transactions carried out, since no transaction concerning the wine mentioned in invoices Nos. 42 and 43, which never left the supplier's sphere, occurred".

l) It concludes by requesting reimbursement of the unduly paid amount and requesting the AT be condemned to pay indemnification interest as follows: "… since the assessment in question results from manifest error attributable to the Tax Administration services, whose recognition is expressly requested, the Claimant also has the right, in accordance with Article 43, No. 1, of the LGT, to indemnification interest".

OF THE SINGLE ARBITRAL TRIBUNAL (TAS)

m) The request for constitution of the TAS was accepted by the President of the CAAD and automatically notified to the AT on 27-02-2017.

n) By the Ethics Council of the CAAD, the undersigned arbitrator was appointed, and the parties were notified thereof on 11.04.2017. The parties did not manifest any intention to refuse the appointment, in accordance with Article 11, No. 1, subsections a) and b) of the RJAT and Articles 6 and 7 of the Ethics Code.

o) The Single Arbitral Tribunal (TAS) has been regularly constituted, as of 28.04.2017, to hear and decide on the subject matter of this dispute (Articles 2, No. 1, subsection a) and 30, No. 1, of the RJAT).

p) All of these acts are documented in the communication of constitution of the Single Arbitral Tribunal dated 28.04.2017, which is hereby reproduced.

q) On 28-04-2017, the AT was notified in accordance with and for the purposes of Article 17-1 of the RJAT. It responded on 29.05.2017, submitting the Administrative File (PA) composed of five computer files, designated as File 1 with 43 pages, PA Part 2 with 40 pages, PA Part 3 with 30 pages, PA Part 4 with 33 pages, and PA Part 5 with 9 pages.

r) The meeting of parties provided for in Article 18 of the RJAT was not held, nor were written or oral submissions made, since the parties, by coinciding position, waived these procedural formalities.

PROCEDURAL REQUIREMENTS

s) Legitimacy, capacity, and representation – The parties are legitimate, possess juridical personality and procedural capacity, and are represented (Articles 4 and 10, No. 2, of the RJAT and Article 1 of Ordinance No. 112-A/2011, of 22 March).

t) Principle of contradiction – The AT was notified in accordance with subsection q) of this Report. All procedural documents and all documents attached to the file were made available to the respective counterparty in the CAAD Case Management System. Both parties were always notified of their attachment.

u) Dilatory exceptions – The arbitral procedure does not suffer from nullities, and the request for arbitral pronouncement is timely, as it was submitted within the deadline prescribed in subsection a) of No. 1 of Article 10 of the RJAT, as results from the fact that the Claimant submitted the request for pronouncement on 20.02.2017 and the dispatch rejecting the petition for administrative reconsideration was notified on 5 December 2016. Moreover, the AT did not challenge the timeliness of the submission of this request for arbitral pronouncement.

SUMMARY OF THE CLAIMANT'S POSITION

v) The Claimant was subject to an external inspection procedure under Service Order No. 012013…, dated 11 February 2013, of limited scope, for the fiscal year 2011, but only on 10 July 2015 was the "notice letter" sent to it, communicating that it would be subject to an inspection action for the fiscal years 2011, 2012, and 2013.

w) It states that the inspection action began on 27 July 2015, with the signature of the Service Order, and ended on 3 December 2015.

x) It further states: "however, the Claimant was also notified of a prior inspection action, under Dispatch No. D12012…, dated 14 January 2013, with the objective of 'consultation, collection and cross-referencing of elements', for the fiscal years 2011 and 2012… signed by the manager of the Claimant on 22 January 2013, the date this inspection action began".

y) It concludes that "… there occurred two external inspection actions, on the same fiscal year, with the same scope and the same taxpayer: a first one under Dispatch No. D12013…, of 14/01/2013, beginning on 22/01/2013, with the signature of the manager of the Claimant; a second one under Service Order No. 012013…, of 11/02/2013, beginning on 27/07/2015, with the signature of the manager of the Claimant".

z) It invokes to support this reasoning that "in accordance with the provisions of Article 13 of the Supplementary Regime of Tax and Customs Inspection Procedure (RCPIT), as to the place where it is carried out, the procedure may be classified as: Internal, when inspection acts are carried out exclusively in the services of the tax administration through formal and coherence analysis of documents; External, when inspection acts are carried out, in whole or in part, in the facilities or premises of the taxpayers or other obligated parties, of third parties with whom they maintain economic relations, or in any other location to which the administration has access".

aa) Concluding that "thus occurred a violation of the provision of Article 63, No. 4, of the LGT, prohibition on repetition of external inspection procedures, insofar as more than one external inspection procedure was carried out with respect to the same taxpayer, tax, and tax period", since "…there did not occur any fact that would give rise to reopening, re-examination, modification, or promotion of amendments to the inspection already initiated, whereby there can only be a violation of these provisions".

bb) Even if that were not the case, it states that "… it must be understood that the inspection action on the year 2011 truly began on 22 January 2013, when the manager of the Claimant signed the Inspection Procedure Dispatch dated 14 January 2013, lasting until January 2015 — since the Claimant does not know the exact date of its termination, given the lack of notification of the Inspection Report", whereby "… the six-month deadline provided in Article 36 of the RCPIT was far exceeded, without any extension having been communicated to the Claimant".

cc) On the other hand, it further invokes that there was an "error in the correction of taxable income", insofar as "the Tax Authority made arithmetic corrections in the context of IRC, based on the conclusions contained in the tax inspection report, which resulted in an increase to taxable income of €100,063.00, due to omission of wine sales, based on wine purchase invoices… (invoices Nos. 42 and 43 attached to the Tax Inspection Report)" with which the Claimant does not agree "… since the Tax Authority understands, merely from the fact that the aforementioned wine is not found recorded in inventory, that there was, without more, a sale", ignoring "… the credit notes Nos. FA00… and FA… issued in relation to invoices numbered 42 and 43".

dd) "… the Claimant has already attempted to clarify, without success, that the wine never entered inventory, because it never left the sphere of company B…, as is evident from the aforementioned credit notes issued, respectively, for the amounts of €63,972.01 and €38,546.71".

ee) Concluding that "furthermore, since there is no evidence in any accounting records of the company — and therefore in the factual truth — of the existence of a sale, as well as its respective value, the AT illegally resorted to the use of indirect methods to determine the taxable income", "in light of which the AT must always keep in mind the markedly exceptional and subsidiary character, in respect of the requirements and conditions provided in Articles 87 and 89 of the LGT", whereby "… it did not violate the provisions of subsection b) of No. 3 of Article 17 of the Corporate Income Tax Code, inasmuch as the accounting records reflect all transactions carried out, since no transaction concerning the wine mentioned in invoices Nos. 42 and 43, which never left the supplier's sphere, occurred".

ff) As to the request for reimbursement of the amount paid and for condemning the AT to pay indemnification interest, it states "… since the assessment in question results from manifest error attributable to the Tax Administration services, whose recognition is expressly requested, the Claimant also has the right, in accordance with Article 43, No. 1, of the LGT, to indemnification interest calculated on such amount", whereby "… once revoked — as is necessary — the assessment acts that are the subject matter of this Request for Arbitral Pronouncement, the amounts unduly paid must be refunded to the Claimant, plus indemnification interest calculated at the legal rate, in accordance with Article 43, No. 1, of the LGT, calculated from the date of such payment until full reimbursement".

SUMMARY OF THE RESPONDENT'S POSITION

By way of opposition

gg) The Respondent has a different interpretation of the facts and contends for the rejection of the request for arbitral pronouncement.

hh) It states that "in compliance with External Service Order No. OI2013…, dated 11-02-2013, an external inspection procedure was developed by the Tax Inspection Division II (DIT II), of the Directorate of Finance of …, on the fiscal year 2011 – of the present Respondent" and that "from said inspection action resulted merely arithmetic corrections, in the context of IRC and VAT, which are properly explained in Chapter III of the Inspection Report"

ii) And that "… what triggered the present proceedings was the opening and closure with corrections of External Service Order No. OI2013…, dated 11-02-2013, developed by the Tax Inspection Division II (DIT II), of the Directorate of Finance of …, on the fiscal year 2011" and that "… in no way related to the proceedings is the indication of the opening of DI2013…, which according to the Claimant is a repetition of the inspection procedure, by reason of the fiscal year 2011 being at issue, thus listing the possible violation of various legal provisions".

jj) It disagrees with the reasoning expounded by the Claimant regarding the existence of two simultaneous external inspection procedures, since "the opening of DI2013… was only and solely for consultation, collection of elements and information requested by the Spanish Authorities, with the objective of collection and sending of information on some operations between A… and C…", and this "… dispatch is not an Inspection Order in the same sense as OI2013…. In this case we have a DI to which the No. 2013… was assigned, which accredited the inspectors to collect the elements requested by the CLO, this because there is no pronouncement whatsoever by our inspection services on the elements collected.

kk) And it continues to state that "Only subsequently with the opening of External Service Order No. OI2013… was the Claimant effectively subject to an inspection action, which culminated with the notification of the Inspection Report to the present Respondent, which occurred through office No. … dated 07-01-2016, to which the registration of Postal Registration Numbers No. RM … PT was assigned, see pages 113 to 115 of the Inspection Report – herein PA", concluding that "therefore on a date prior to the assessment, and in compliance with the provisions of No. 1 and No. 2 of Article 62 of the RCPIT, for conclusion of the verification and checking procedure, a final report is prepared with a view to identifying the detected facts and their legal-tax classification, which 'must be notified to the taxpayer by registered mail within 10 days following the expiration of the deadline referred to in No. 4 of Article 60, with the procedure being considered concluded on the date of notification'", and that "… OI201…, initially was partial and included fiscal years 2011, 2012, and 2013, subsequently, the scope of the inspection action became general".

ll) And it explains that "…the SIIIT (computerized system supporting tax inspections), from 2014/2015 onwards ceased to permit the inclusion of more than one fiscal year in each service order", resulting that "… when the scope of the inspection was modified, two new SOs had to be opened", resulting that "OI2013… came to include only 2011 and SO2015… and SO2015… were opened, respectively for 2012 and 2013", as is properly explained in the inspection report.

mm) It concludes by stating that in light of this information "… the arguments set forth in the request for arbitral pronouncement that defended the existence of a repetition of inspection procedure on the fiscal year 2011, should be rejected as unproven".

nn) As to the corrections made in the context of inspection, the Respondent disagrees with the Claimant's point of view.

oo) First, because "… the correction relating to the omission of wine sales is properly explained and justified in Chapter III-1 of the Tax Inspection Report, see pages 22 to 31 of the Petition for Administrative Reconsideration File and pages 10 to 18 of the Tax Inspection Report", occurring that "From the analysis made of the documents supporting the accounting entries, the Tax Inspection Services verified situations that negatively influenced the Net Income of the Period through the determination of the Cost of Goods Sold and Materials Consumed (CMVMC), without any counterpart in revenue".

pp) And then because "in summary form the SIT verified that: the inventory as of 31 December 2011 does not include the content of invoices Nos. 42 and 43, issued in 2011 by B…; in the Financial Statements of fiscal year 2012, the value mentioned as opening inventory is the same as the inventory as of 31 December 2011; the wine acquired in invoices Nos. 42 and 43, issued in 2011 by B…, does not appear in any wine sales invoice contained in the accounting records; although the taxpayer, in response to the notification made in the course of the inspection procedure, argues that the wine was returned, in part, by Credit Note No. …, dated 03-03-2015, it is verified that the returned wine does not match the wine contained in invoices Nos. 42 and 43; Both invoices were accounted for in a sub-account 31 – purchases (31212 – Purchases of raw materials/merchandise intra-community); invoices Nos. 42 and 43 affected the Cost of Goods Sold and Materials Consumed (CMVMC) by €100,063.00, however there is no sale of wines in the accounting records, nor is it contained in the closing inventory; invoices Nos. 42 and 43, issued in 2011 by B…, were paid by A…, as can be observed from the supplier's account statement – account 221120224 – B…".

qq) Therefore, the Tax Inspection Services concluded that: "(…) the wine was disposed of by the taxpayer in the course of fiscal year 2011, however the respective sale is not reflected in the accounting records, that is, there is an omission of wine sales in the taxpayer's accounting records". "The wines in question were acquired through invoice No. 42, dated 26-09-2011, in the amount of €48,000.00 and No. 43, dated 09-12-2011, in the amount of €52,063.00, both issued by B…". "Because in the taxpayer's accounting records, relating to fiscal year 2011, wine sales are not very significant, it was not possible to determine the gross sales margin obtained. Thus, we will proceed to determine the amount of omitted wine sales, considering the sales value equal to the respective acquisition value".

An increase in sales of €100,063.00 was determined."

rr) Therefore, "… in accordance with the combined provisions of No. 1 of Article 17, subsection b) of No. 3 of the same article, and also subsection a) of No. 1 of Article 20, all of the Corporate Income Tax Code, the amount of €100,063.00 must be added to net income, and the respective expense is already reflected in the cost of inventories sold and consumed determined by the taxpayer and declared to the Tax Administration", "all the more so because to date the claimant has not attached to the proceedings (neither with the AT nor with the request for arbitral pronouncement) the Credit Note No. FA… in the amount of €63,972.01", "because the Credit Note FA… attached does not relate to the wine acquisitions contained in invoices Nos. 42 and 43".

ss) It also disagrees that the AT resorted to taxation using indirect methods, because "…from the analysis of the justification of the Inspection Report that explains the corrections made, we verify an unfoundedness of such allegations as it is a direct quantification".

tt) As to the request for reimbursement of the amounts paid by the Claimant and for condemning the AT to pay indemnification interest, it states that "… the Tax Administration made the application of the law, mandatorily, in accordance with what, as an executive body, it is constitutionally bound to do, and one cannot speak of error by the services in accordance with Article 43 of the LGT", since "the tax acts in question are valid and legal, because they are in conformity with the legal regime in force at the date of the tax facts, and there has occurred, in this case, no error attributable to the services".

uu) It contends for the maintenance in the legal order of the tax acts in question as they are in conformity with the law with rejection of the requests and consequent absolution of same.

II - ISSUES FOR THE TRIBUNAL TO RESOLVE

In the first place, it is incumbent upon the TAS to determine whether, in light of the facts brought to the proceedings and which are admitted by agreement or proven by documents, we are dealing with two tax inspection procedures (external) in light of the definition contained in the law (Article 13 of the Supplementary Regime of Tax Inspection Procedure – RCPIT).

That is to say, it will be necessary to determine whether the first action taken under Dispatch No. D12013…, of 14/01/2013, beginning on 22/01/2013, with the signature of the manager of the Claimant, corresponds to an external tax inspection procedure, since as to the second action taken under Service Order No. 012013…, of 11/02/2013, beginning on 27/07/2015, this is not questioned.

If the first procedure is to be classified as an "external fiscal inspection procedure," there will then be a need to verify whether or not the other requirements for the admissibility of more than one procedure provided for in No. 4 of Article 63 of the LGT are met (as to the same taxpayer or tax obligor, tax, and tax period).

If the first procedure is not to be classified as an "external fiscal inspection procedure," or if the requirements are met that permit the existence of more than one procedure, as to the same taxpayer or tax obligor, tax, and tax period, there will then be a need to proceed to the analysis of the second ground adduced by the Respondent to contest the assessment, namely "error in the correction of taxable income," either due to alleged failure to consider credit notes Nos. 42 and 43, or due to alleged use of indirect methods to determine taxable income in IRC.

Finally, if the request for arbitral pronouncement is well-founded, there will be a need to consider the request for reimbursement of the amounts paid through the offsetting assessment being contested and also the right to indemnification interest.

It should be noted that tax arbitral tribunals can only decide according to "established law".

III. PROVEN AND UNPROVEN FACTS.

GROUNDS

As to the facts, the Tribunal does not have to rule on everything that was alleged by the parties, and instead it has the duty to select the facts that matter for the decision and to distinguish the proven facts from those not proven (in accordance with Article 123, No. 2, of the Code of Tax Procedure and Process (CPPT) and Article 607, No. 3 of the Code of Civil Procedure, applicable by force of Article 29, No. 1, subsections a) and e), of the RJAT).

Thus, the pertinent facts for the judgment of the case are chosen and demarcated in function of their legal relevance, which is established in light of the various plausible solutions of the legal issue(s) (in accordance with the prior Article 511, No. 1, of the Code of Civil Procedure, corresponding to the current Article 596, applicable by force of Article 29, No. 1, subsection e), of the RJAT).

Thus, taking into account the positions assumed by the parties and the documentary proof attached, the following facts were considered proven, with relevance to the decision, the facts listed below, indicating the respective documents (proof by documents), as justification.

Proven Facts

1. On 14 January 2013, the Tax Inspection Services of the Directorate of Services of … proceeded to issue a dispatch accrediting two tax inspectors with No. D12012…, in accordance with Nos. 4 and 5 of Article 46 of the RCPIT with the purpose of obtaining from the Claimant "consultation, collection and cross-referencing of elements" as to the fiscal years 2011 and 2012 – in accordance with document No. 3 attached with the request for arbitral pronouncement (ppa), Article 11 of the ppa, and partially Articles 17 to 20 of the response.

2. On 22 January 2013, the manager of the Claimant became aware of the dispatch referred to in the preceding number, to whom a copy was delivered – in accordance with document No. 3 front attached with the request for arbitral pronouncement (ppa) and Article 12 of the ppa.

3. On 15 April (04) 2013, the manager of the Claimant signed the note of diligence (Article 64 of the RCPIT) issued by the Tax Inspection Services of the Directorate of Services of … – in accordance with document No. 3 back attached with the request for arbitral pronouncement (ppa).

4. On 11 February 2013, the Tax Inspection Services of the Directorate of Services of … proceeded to issue Service Order No. 012013… by which tax inspectors were accredited to carry out the external inspection procedure on the Claimant, as to the fiscal year 2011 – in accordance with inspection report: page 18 of the PA (File 1 with 43 pages), page 7/43 of document No. 2 attached with the ppa, Article 8 of the ppa, and Article 13 of the response.

5. On 10 July 2015, in compliance with the provisions of subsection l) of No. 3 of Article 59 of the General Tax Law and of Article 49 of the Supplementary Regime of Tax Inspection Procedure, a "notice letter" was sent to the Claimant, through office No. …, notifying it that it would be subject to an inspection action for the years/fiscal years 2011, 2012, and 2013, and subsequently came to include only the year/fiscal year 2011 – in accordance with inspection report: page 18 of the PA (File 1 with 43 pages), page 7/43 of document No. 2 attached with the ppa, and Article 9 of the ppa.

6. On 27 July 2015, the external inspection procedure began, the Service Order being signed by the manager of the company, and the analysis of the accounting documents was carried out, at the indication of the taxpayer, on the premises of the tax advisor – in accordance with inspection report: page 18 of the PA (File 1 with 43 pages), page 7/43 of document No. 2 attached with the ppa, and Article 10 of the ppa.

7. On 3 December 2015, the inspection acts terminated with the signature of the respective note of diligence, signed by the manager of the company here Claimant – in accordance with inspection report: page 18 of the PA (File 1 with 43 pages), page 7/43 of document No. 2 attached with the ppa, and Article 10 of the ppa.

8. On 7 January 2016, by office No. …, the Claimant was notified of the Inspection Report resulting from the inspection procedure referred to in Nos. 4 to 7 above, by means of registration No. RM … PT, delivered on 12 January 2016 – in accordance with Article 23 of the response and pages 113 to 115 of the PA (PA Part 4).

9. The Inspection Report contains corrections in the context of IRC, namely:

In accordance with pages 18/43 of document No. 1 attached with the ppa and pages 30 of the PA (File 1 with 43 pages).

1. On 13 January 2016, the Respondent issued the Corporate Income Tax assessment 2016… relating to the year 2011, in the amount of €31,696.62 and the compensatory interest assessment No. 2016… in the amount of €4,536.52, totaling an amount to pay of €36,233.14 – in accordance with pages 120 of the PA (PA Part 4) attached with the response, Article 1 of the ppa, and Article 1 of the response.

2. On 11 May 2016, the Claimant paid the global amount referred to in the preceding number – in accordance with document No. 1 attached with the ppa.

3. On 12 July 2016, the Claimant filed a petition for administrative reconsideration against the IRC assessments referred to in 10 above, which was given the number …2016…, which, after prior hearing, was rejected by dispatch of 30 November 2016 from the Head of the Tax Justice Division of the Directorate of Finance of …, notified to the Claimant by office … and received by it on 5 December 2016 – in accordance with Article 2 of the ppa, page 1 of the PA (File 1 with 43 pages), pages 150, 151, and 152 of PA Part 4.

4. On 20 February 2017, the Claimant filed with the CAAD this request for arbitral pronouncement (ppa) – entry registration in the CAAD CPM of the request for arbitral pronouncement.

Unproven Facts

There is no other factuality alleged that has not been considered proven and that is relevant for the composition of the procedural dispute.

IV. CONSIDERATION OF THE ISSUES FOR THE SINGLE ARBITRAL TRIBUNAL (TAS) TO RESOLVE

In light of the proven facts, it is incumbent, in the first place, to verify whether the procedure referred to in Nos. 1 to 3 of the facts considered established corresponds to an external inspection procedure, since, as to the second action taken under Service Order No. 012013…, of 11/02/2013, beginning on 27/07/2015, this is not questioned.

If this first procedure is to be classified as an "external fiscal inspection procedure," there will then be a need to verify whether or not the other requirements for the admissibility of more than one procedure are met, as prescribed in No. 4 of Article 63 of the LGT (as to the same taxpayer or tax obligor, tax, and tax period).

From the outset, the credentialing document itself refers to "inspection procedure – dispatch – in accordance with Nos. 4 and 5 of Article 46 of the RCPIT".

Now, by inserting the credentialing in Article 46 of the RCPIT, the AT is considering that it is going to initiate an external inspection procedure, as is clear from No. 1 of Article 46 of the same RCPIT.

The alleged difference between Service Order and Dispatch is not relevant here, since, in both cases, we are dealing with external inspection procedures.

As to the matter of repetition of external inspection procedures, the CAAD has already ruled, at least in the collective decisions adopted in proceedings 14/2012-T and 172/2016-T.

Reference is made to what is expressed in the collective decision adopted in CAAD proceedings 14/2012-T, to which we adhere:

"The criterion for distinguishing between internal and external inspection procedures is derived from Article 13 of the Supplementary Regime of Tax Inspection Procedure, in which it is clarified that the procedure is internal 'when inspection acts are carried out exclusively in the services of the tax administration through formal and coherence analysis of documents' and is external 'when inspection acts are carried out, in whole or in part, in the facilities or premises of the taxpayers or other tax obligors, of third parties with whom they maintain economic relations, or in any other location to which the administration has access'.

The criterion for distinguishing between internal and external inspection procedures is based, thus, on the existence or not of acts practiced outside the services of the Tax Administration for obtaining relevant elements: if acts were practiced exclusively in those services, we are dealing with an internal procedure; if any or some acts necessary to ascertain the tax facts were practiced outside those services, 'in whole or in part', we are dealing with an external procedure.

Which allows us to conclude that the analysis of documents that were obtained by the Tax Administration based on acts practiced outside its services is to be qualified as an act of external inspection procedure, because, regardless of whether the analysis activity was carried out in the facilities of the Tax Administration, it was not based exclusively on the formal and coherence analysis of documents that the tax administration had without having practiced external inspection acts. The inspection will only be qualifiable as internal when it was carried out based on documents not obtained through inspection acts external to the services".

In light of this classification of inspections, as to the activity of the Tax Administration, of "consultation, collection, and cross-referencing of elements" as to the fiscal year 2011, carried out through the procedure referred to in Nos. 1 to 3 of the proven facts, it is not shown or evident that the elements consulted, collected, or cross-referenced, were not taken into account, directly or indirectly, in the Inspection Report and subsequently in the assessments here being contested.

The elements obtained in the context of this procedure were obtained in the premises of the Claimant, not in the services of the AT, as results from the very nature of the credentialing issued to the inspector officials.

It is concluded, therefore, that the procedure in question is an external inspection procedure, and indeed, as the AT itself considered when issuing Document No. 3 in attachment to the request for arbitral pronouncement.

Let us return to the collective decision adopted in CAAD proceedings 14/2012-T, to which we adhere:

"… Article 63, No. 3, of the LGT (in the initial wording, current No. 4), after establishing that 'the inspection procedure and the duties of cooperation are adequate and proportional to the objectives to be pursued', provides that there may only be 'more than one external fiscal inspection procedure with respect to the same taxpayer or tax obligor, tax, and tax period by decision, justified based on new facts, of the head of the service, unless the inspection aims only at confirming the premises of rights that the taxpayer invokes before the tax administration and without prejudice to the determination of the tax situation of the taxpayer by means of inspection or inspections directed at third parties with whom it maintains economic relations'.

The objective of that prohibition is, in the first place, to prevent the same taxpayer or tax obligor from being burdened more than once with the inconveniences that external fiscal inspection actions are capable of causing.

But, combining this norm with those of Article 36, Nos. 2 and 3, of the Supplementary Regime of Tax Inspection Procedure, in which it is established that 'the inspection procedure is continuous and must be concluded within a maximum period of six months from the notification of its beginning' and may only be expanded for two more periods of three months, in the circumstances there exhaustively indicated (without prejudice to suspension in the cases provided for), it is concluded that the effects of that prohibition of, without 'new facts', carrying out a new external inspection procedure with respect to the same taxpayer or tax obligor, tax, and tax period, are amplified, as from the entirety of this legal regime results a guarantee for the taxpayer that the legal definition of its situation effected following the conclusion of the external inspection procedure cannot be altered, based on facts that were ascertained by the Tax Administration during the inspection.

Indeed, as was mentioned, all the relevance of the fixing of maximum deadlines for conclusion of the inspection procedure would be rendered useless if it were understood that the Tax Administration could, after the inspection report was prepared and the procedure concluded, prepare new reports based on elements collected during the inspection.

The protective scope of said regime is confirmed, in a clear manner, by Article 64 of the RCPIT, in which the possibility of extending the prohibition on altering the legal position assumed in the inspection report is provided for, through the sanctioning of the conclusions of the inspection report, which prevents the Tax Administration from 'proceeding against the inspected entity in a manner different from the content of the conclusions of the report in the three years following the year of the date of notification thereof, unless simulation, falsification, violation, concealment, or destruction of any tax-relevant elements relating to the subject matter of the inspection is subsequently ascertained' (No. 4 of this Article 64)."

Nothing prevented the AT from, through a single external fiscal inspection procedure, obtaining the elements it wished to collect, especially those it refers to in Article 17 of the Response "consultation of elements and information requested by the Spanish authorities", as to the relations between the activity of the company in Portugal and in Spain, together with the other elements that would permit evaluating the correct fulfillment of the company's tax obligations, at the level of VAT and IRC.

No "new" facts are invoked as justification for the second inspection procedure, nor is it alleged that the procedure of Nos. 4 to 7 of the proven facts aimed only at confirming the premises of rights that the taxpayer has invoked before the tax administration, or determining the tax situation of the taxpayer by means of inspection or inspections directed at third parties with whom it maintains economic relations.

It further results from the reading of the Inspection Report that the cross-referencing of commercial relations between the Claimant, acting in Portugal, and the Claimant, acting in Spain, was determining, and it is not known, or at least it is not evident in this proceeding, in which specific inspection procedure the elements were obtained.

Let us return once again to the collective decision adopted in CAAD proceedings 14/2012-T, to which we adhere:

"Article 36, No. 2, of the Supplementary Regime of Tax Inspection Procedure establishes that 'the inspection procedure is continuous and must be concluded within a maximum period of six months from the notification of its beginning'. The rule is reaffirmed in Article 53 of the same act, in which it is established that 'the practice of inspection acts is continuous, only being able to suspend in case of exceptional and pressing priorities of the tax administration recognized in a justified dispatch of the head of the service', but without prejudice to the legal deadlines for conclusion of the procedure provided for in that act (Nos. 2 and 3 of this Article 53).

That deadline of the inspection procedure 'may be extended' for two more periods of three months, in the circumstances described in No. 3 of that Article 36.

But, as the very term indicates, the extension does not prejudice the rule of continuity, and it must be decided before the procedure ends. The extension must be a 'postponement' and not a reopening or renewal of an already concluded procedure. Indeed, No. 4 of the same article, in which it is established that 'the postponement of the inspection action is notified to the inspected entity with an indication of the expected date of the conclusion of the procedure', confirms that this is the sense of that possibility of extension.

The analysis of elements collected during the external inspection action is integrated within the scope of the inspection procedure, as it must culminate with a report in which the detected facts and their legal-tax classification must be identified and systematized, including 'description of the tax-relevant facts that alter the values declared or to be declared subject to taxation, with mention and attachment of the means of proof and legal grounds supporting the corrections made' [Art. 63, Nos. 2 and 3, subsection i), of the RCPIT, relating to 'conclusion of the inspection procedure'].

That report is the appropriate procedural moment to consider all probative elements ascertained, including those furnished by the taxpayer in the exercise of the right of hearing that procedurally precedes it".

Now, it is not shown that the first procedure had, as to its deadline, been extended.

There thus occurs a violation of the provision of Article 63, No. 4, of the LGT (existence of more than one external procedure) when one promotes

an external inspection procedure, based on a dispatch of 14 January 2013, with the purpose of proceeding with the Claimant to "consultation, collection and cross-referencing of elements" as to the fiscal years 2011 and 2012, initiated on 22 January 2013 and concluded on 15 April (04) 2013;

and then one promotes another

external inspection procedure, based on a Service Order of 11 February 2013, as to the fiscal year 2011, initiated on 27 July 2015, with the analysis of the accounting documents being carried out, at the indication of the taxpayer, on the premises of the tax advisor, and having concluded on 3 December 2015.

Such action also violates the principle of legality. We return to the collective decision adopted in CAAD proceedings 14/2012-T, to which we adhere:

"Indeed, Article 55 of the LGT, in harmony with Article 266 of the Constitution of the Portuguese Republic, establishes that 'the tax administration exercises its attributions in pursuit of the public interest, in accordance with the principles of legality, equality, proportionality, justice, impartiality, and promptness, in respect of the guarantees of taxpayers and other tax obligors'.

Specifying the 'principle of legality', Article 3, No. 1, of the Code of Administrative Procedure [subsidiarily applicable, by way of Article 2, subsection c), of the LGT] provides that 'the bodies of Public Administration must act in obedience to the law and to the law, within the limits of the powers attributed to them and in conformity with the purposes for which such powers are conferred to them'.

That limitation derived from the powers that are conferred on the Administration shows that the principle of legality ceased to have 'a formulation solely negative (as in the period of the Liberal State), to have a positive formulation, constituting the foundation, the criterion, and the limit of all administrative action'"

…

It should be noted, in this context, that the fact that the Claimant does not expressly invoke the violation of this principle as a vice of the act being contested is not an obstacle to giving this legal framework to the invocation of the lack of legal foundation…

In truth, the application of the appropriate legal framework is not confused with an alteration of the cause of action and the principle ius novit curia governs our procedural law, which is translated into the court not being limited by the allegations of the parties as to the investigation, interpretation, and application of the rules of law (Article 664 of the Code of Civil Procedure).

In contestatory proceedings, when the cause of action is a certain illegitimate behavior of the Administration, which is invoked as the foundation of the request for annulment, there is no 'necessity of relating the fact with the normative fattispecie', being able 'the judge to apply a norm that the appellant has not indicated, or a norm different from that which has been erroneously indicated by the appellant, as long as the appellant has correctly qualified the conduct as illegal, by reference to the material content of a norm effectively existing'"

In the specific case here under consideration, in light of the ascertained facts and the content of the extensive Inspection Report, it is configured that the Claimant is correct when it states in Article 15 and 25 of the ppa that "given the result produced, it is not possible to defend that the first inspection procedure aimed only at the collection of information, but it can be stated that it was much more than that, as it was on this information that the entire subsequent inspection action was based" and that "… there did not occur any fact that would give rise to reopening, re-examination, modification, or promotion of amendments to the inspection already initiated, whereby there can only be a violation of these provisions".

Upon reading the Inspection Report, it is verified that a large part of the operations that the AT understood to be erroneously considered in the Company's Accounting relate to the relationship between A… and C….

From the succession of facts contained in Nos. 1 to 7 of the proven facts, the judgment that this TAS makes is that the AT only after carrying out the acts that were part of the first external fiscal inspection procedure and in light of the elements collected there did it ascertain that there was a basis for proceeding with the acts of fiscal inspection that were part of the second procedure, meanwhile issuing the respective Service Order.

There was not proven the existence of any fact that would give rise to reopening, re-examination, modification, or promotion of amendments to the first inspection already initiated.

Therefore, in the terms set forth, the request for pronouncement is well-founded, as the second inspection procedure could not be carried out in the manner in which it was, under penalty of existence of dissonance with the provision of Article 63, No. 4, of the LGT (existence of more than one external fiscal inspection procedure with respect to the same taxpayer or tax obligor, tax, and tax period).

Since the request for pronouncement is well-founded based on the first ground of illegality invoked (non-conformity with No. 4 of Article 63 of the LGT), consideration of the other grounds invoked is foreclosed.

Request for Reimbursement of Amounts Paid and Request for Condemning the AT to Pay Indemnification Interest

The Claimant has succeeded in proving that it paid the amounts corresponding to the Corporate Income Tax assessment 2016… relating to the year 2011, in the amount of €31,696.62, here being contested, and compensatory interest assessment No. 2016… in the amount of €4,536.52, totaling an amount to pay of €36,233.14, in accordance with No. 11 of the proven facts.

Annulling, as will be annulled, the assessments here being contested (the Claimant does not petition for the annulment of the dispatch which rejected its petition for administrative reconsideration), because they are non-conforming with the law, it results that the Claimant is entitled to reimbursement of the global amount paid.

It further requests indemnification interest.

In accordance with the provisions of subsection b) of Article 24 of the RJAT, the arbitral decision on the merits of the pretension, in respect of which there is no recourse or challenge, binds the Tax Administration from the expiration of the deadline provided for recourse or challenge, and this must, in the exact terms of the well-foundedness of the arbitral decision in favor of the taxpayer and until the expiration of the deadline provided for the execution of judgments of tax judicial courts, 'restore the situation that would have existed if the tax act that is the subject matter of the arbitral decision had not been carried out, adopting the acts and operations necessary for that purpose', which is in harmony with the provision in Article 100 of the LGT (applicable by force of the provision in subsection a) of No. 1 of Article 29 of the RJAT) which establishes that 'the tax administration is obliged, in the case of partial or complete well-foundedness of petition for administrative reconsideration, judicial challenge, or appeal in favor of the taxpayer, to immediately and fully restore the legality of the act or situation that is the subject matter of the dispute, comprising the payment of indemnification interest, if applicable, from the expiration of the deadline for execution of the decision'.

Although Article 2, No. 1, subsections a) and b), of the RJAT uses the expression 'declaration of illegality' to define the competence of the arbitral tribunals functioning in the CAAD, making no reference to condemnatory decisions, it should be understood that the competences include the powers that, in judicial challenge proceedings, are attributed to the tax courts, and this is the interpretation that is in harmony with the sense of the legislative authorization on which the Government based itself to approve the RJAT, in which the first directive is proclaimed, that 'the tax arbitration process must constitute an alternative procedural means to the judicial challenge process and to the action for the recognition of a right or legitimate interest in tax matters'.

The judicial challenge proceeding, although it is essentially an annulment proceeding of tax acts, admits the condemnation of the Tax Administration to pay indemnification interest, as is inferred from Article 43, No. 1, of the LGT, in which it is established that 'indemnification interest is due when it is determined, in petition for administrative reconsideration or judicial challenge, that there was error attributable to the services from which results payment of the tax debt in an amount exceeding that legally due' and Article 61, No. 4, of the CPPT (in the wording given by Law No. 55-A/2010, of 31 December, to which corresponds No. 2 in the initial wording), which states 'if the decision that recognized the right to indemnification interest is judicial, the deadline for payment is counted from the beginning of the deadline of its voluntary execution'.

Thus, No. 5 of Article 24 of the RJAT, in stating that 'payment of interest, regardless of its nature, is due, as provided for in the general tax law and the Code of Tax Procedure and Process', should be understood as permitting the recognition of the right to indemnification interest in the arbitration process.

In the case at hand, it is manifest that, following the annulment of the assessments, there is a place for reimbursement of the tax paid, by force of the aforementioned Articles 24, No. 1, subsection b), of the RJAT and 100 of the LGT, because such is essential to 'restore the situation that would have existed if the tax act that is the subject matter of the arbitral decision had not been carried out'.

The substantive regime of the right to indemnification interest is regulated in Article 43 of the LGT, which establishes, insofar as relevant here, the following:

Article 43

Payment of Unduly Paid Tax Obligation

1 – Indemnification interest is due when it is determined, in petition for administrative reconsideration or judicial challenge, that there was error attributable to the services from which results payment of the tax debt in an amount exceeding that legally due.

2 – There is also considered to be error attributable to the services in cases in which, although the assessment is made based on the declaration of the taxpayer, the latter has followed, in its completion, the generic guidance of the tax administration, duly published.

3 – Indemnification interest is also due in the following circumstances:

a) When the legal deadline for voluntary restitution of taxes is not complied with;

b) In case of annulment of the tax act by initiative of the tax administration, from the 30th day following the decision, without the credit note having been processed;

c) When the revision of the tax act by initiative of the taxpayer is made more than one year after the taxpayer's request, except if the delay is not attributable to the tax administration.

4 – The rate of indemnification interest is equal to the rate of compensatory interest.

5 – In the period that elapses between the date of the expiration of the deadline of voluntary execution of a final judicial decision and the date of issuance of the credit note, relating to the tax that should have been refunded by a final judicial decision, default interest is due at a rate equivalent to double the rate of default interest defined in general law for debts to the State and other public entities. (Added by Law No. 64-B/2011, of 30 December).

The illegality of the assessments is attributable to the Tax Administration, which issued them based on an inspection report resulting from a second external fiscal inspection procedure, in dissonance with the law.

In the present case, the regime of No. 1 of Article 43 of the LGT is to be applied.

Citing again the collective decision CAAD Proceedings 14/2012-T, to which we adhere: "It has been understood, based on the reference that is made in this norm to 'error' that only in cases of annulments founded on vices relating to the tax legal relationship is there place for payment of indemnification interest, such right not being recognized in case of annulments due to procedural or formal vices (without prejudice to the right of indemnification derived from illegal acts which the injured party always has in accordance with the general terms of extracontractual civil liability, if the respective prerequisites are met).

In the present case, we are dealing with a vice which, although rooted in the violation of norms of a procedural nature relating to the tax inspection procedure, is reconditioned to a vice relating to the tax legal relationship, because what is at issue is the right that the taxpayer has to see maintained the definition of the content of this relationship that was effected by the… act of additional assessment, carried out following the conclusion of the (second) external inspection procedure."

Consequently, the Claimant is entitled to indemnification interest, in accordance with Articles 43, No. 1, of the LGT and 61 of the CPPT, from 11 May 2016, on the amount of €36,233.14.

Indemnification interest is due on said amount, at the legal suppletive rate, in accordance with Articles 43, Nos. 1, and 35, No. 10, of the LGT, Article 24, No. 1, of the RJAT, Articles 61, Nos. 3 and 4, of the CPPT, Article 559 of the Civil Code, and Ordinance No. 291/2003, of 8 April (or such other ordinances as may alter the legal rate), from the date above indicated and until the issuance of the respective credit note.

V - RULING

In accordance with and based on the grounds set forth above, it is decided:

1. To find well-founded the request for a declaration of illegality of the tax act of Corporate Income Tax assessment No. 2016…, relating to the year 2011, in the amount of €31,696.62, due to non-conformity with No. 4 of Article 63 of the LGT.

To find well-founded the request for declaration of illegality of the tax act of compensatory interest assessment in the amount of €4,536.52, due to non-conformity with No. 4 of Article 63 of the LGT.

To find well-founded the request for recognition of the Claimant's right to reimbursement of the amounts paid, for a total of €36,233.14.

To find well-founded the request for recognition of the Claimant's right to indemnification interest at the legal rate, from the date of payment of the global amount of €31,696.62, until the date of its full reimbursement.

Value of the Proceeding

In accordance with the provisions of Article 3, No. 2, of the Regulation of Costs in Tax Arbitration Proceedings (and subsection a) of No. 1 of Article 97-A of the CPPT), the value of the proceeding is fixed at €36,233.14.

Costs

In accordance with the provisions of Article 22, No. 4, of the RJAT, the amount of costs is fixed at €1,836.00, in accordance with Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent.

Notify.

Lisbon, 26 July 2017

Single Arbitral Tribunal (TAS),

Augusto Vieira

Text prepared by computer in accordance with the provisions of Article 131, No. 5, of the Code of Civil Procedure, applicable by remission of Article 29 of the RJAT.

The wording of this decision is governed by the spelling rules prior to the Orthographic Agreement of 1990.