Process: 136/2017-T

Date: December 11, 2017

Tax Type: IRC

Source: Original CAAD Decision

Summary

In Process 136/2017-T, a Malta-resident company challenged IRC assessments for 2012 and 2013 before CAAD, alleging lack of reasoning (falta de fundamentação) and improper disallowance of deductible expenses. The Tax Authority disallowed maintenance, conservation, and utility expenses for a rental property, applying a proportionality criterion based on periods when the property generated income versus vacancy periods. The applicant argued the inspection report failed to specify which concrete expenses were non-deductible, violating the duty of reasoning under article 77 of the General Tax Law (LGT). Key arguments included: (1) maintenance and conservation expenses qualify as deductible under article 41 of the Personal Income Tax Code regardless of occupancy periods; (2) utilities like electricity and water are indispensable for economic activity even during vacancy; (3) certain maintenance work can only be performed when property is unoccupied; (4) the TCA failed to meet its burden of proof under article 74 of LGT; and (5) the assessment lacked sufficient reasoning as required by article 268 of the Portuguese Constitution and article 77 LGT. The applicant petitioned for annulment of the IRC assessments and the partial deferral decision on the administrative appeal, claiming both substantive error (incorrect application of deductibility rules) and formal defect (insufficient reasoning). The case highlights fundamental principles of Portuguese tax procedure: the Administration's duty to provide express, accessible reasoning for acts affecting taxpayer rights; the burden of proof resting on the Tax Authority for constitutive facts; and the requirement that corrections be specifically justified rather than based on generic proportionality assumptions. The arbitral tribunal was constituted on April 28, 2017, under the Legal Framework for Tax Arbitration (RJAT).

Full Decision

ARBITRAL DECISION

I. Report

  1. A..., a company resident in Malta, with Portuguese taxpayer number ... (hereinafter designated as "Applicants"), hereby, pursuant to the provisions of articles 2, no. 1, paragraph a) and 10, no. 1, paragraph a), of Decree-Law no. 10/2011, of January 20, which approved the Legal Framework for Tax Arbitration (hereinafter only "LFTA"), files a request for constitution of an arbitral tribunal, in which the Tax and Customs Authority (hereinafter only "Respondent" or "TCA") is the respondent.

  2. The present request for arbitral pronouncement was filed on 23/02/2017;

  3. In the respective request, the Applicants requested the Deontological Council of CAAD to designate an Arbitrator, pursuant to the provisions of articles 6, no. 1 and 11, both of the LFTA.

  4. The request for constitution of the arbitral tribunal was accepted by His Excellency the President of CAAD and automatically notified to the TCA on 27/02/2017, with the Parties being notified on 11/04/2017 of the arbitrator designated by the Deontological Council of CAAD, the undersigned herein.

  5. After acceptance by the arbitrator then designated, the present Arbitral Tribunal considered itself constituted on 28/04/2017, in accordance with the provisions of articles 2, no. 1, paragraph a), 5, 6, no. 1, and 11, no. 1, all of the LFTA (as amended by article 228 of Law no. 66-B/2012, of December 31).

  6. Within the scope of the request for arbitral pronouncement presented, the Applicants petitioned for the declaration of illegality of the acts of assessment of Corporate Income Tax (IRC) for the tax periods of 2012 and 2013, namely the following: i) as to the period of 2012, the statement of assessment of IRC no. 2016..., of January 28, 2016, the statement of assessment of compensatory interest no. 2016... and the statement of account adjustment no. 2016..., both dated February 1, 2016, and (ii) as to the period of 2013, the statement of assessment of IRC no. 2016..., of January 28, 2016, the statement of assessment of compensatory interest no. 2016... and the statement of account adjustment no. 2016..., both of February 2, 2016.

  7. It further petitions for the declaration of illegality of the decision of partial deferment that was issued on the Administrative Appeal filed by the now Applicant with reference to the aforementioned acts of assessment of IRC of 2012 and 2013.

  8. The Applicant attached 4 documents to the arbitral request, in addition to all the documentation that accompanied the Administrative Appeal filed against the acts of assessment in question.

  9. Having analyzed the arguments invoked by the Applicant in the arbitral request, we may summarize them as follows:

i) The Inspection Report in question refrained from indicating which expenses are concretely non-deductible when the description does not permit classification of the asset/service provision supported, those that are non-deductible because they are 'current expenses' or the other non-deductible expenses;

ii) Additionally, the TCA bases the tax obligation that it claims is incumbent upon the Applicant on an alleged proportionality that should exist between the expenses incurred and the periods in which the Applicant's property generates income;

iii) The proof that the TCA demands of the Applicant is not, in the latter's opinion, proof that it must present, since such allocation has no bearing whatsoever on the deductibility of expenses under article 41 of the Personal Income Tax Code;

iv) Imposing upon the Applicant the burden of renting its property on all days of the year so that maintenance and conservation expenses can be deductible under article 41 of the Personal Income Tax Code is not only a reality that the Applicant cannot control, but also an extraneous and inadequate interference in its day-to-day management;

v) By way of example, some of the maintenance and conservation expenses of the Applicant's property concern maintenance and conservation work that can only be carried out when the property is not occupied;

vi) In the case of electricity and water, it is wholly unreasonable on the one hand not to accept these expenses, as well as to apply a proportionality to an expense in which the Applicant is obliged necessarily to incur, since at any time it may need to rent its property;

vii) The absence of electricity and water, even if temporarily, would render any and all economic activity of the property impossible;

viii) The Applicant provided the TCA with the evidentiary elements that were demanded of it, demonstrating, in particular, the invoices for the maintenance and conservation expenses in which it incurred;

ix) The Applicant finds no reason why the TCA should presume that, by failing to rent its property, the maintenance and conservation expenses related to the same are not deductible for tax purposes;

x) In this context, the reasoning that supports the correction under analysis amounts to nothing more than a mere exercise in simplification by the TCA;

xi) The legislative intention behind the requirement of reasoning of tax administrative acts, established in article 77 of the LGT, is that of guaranteeing transparency (and consideration) of the Administration's actions, to ensure the possibility of hierarchical and judicial control thereof and so that the administered party (taxpayer) may be given the opportunity to formulate a conscious judgment on the necessity and convenience of challenging it;

xii) The TCA was at minimum obliged to reason the correction that it effected;

xiii) The reasoning is obscure and insufficient, because its content is not sufficient to explain the true reasons why the acts in question were performed;

xiv) No. 1 of article 74 of the LGT is clear in providing that the burden of proving the constitutive facts of the rights it invokes falls upon the TCA;

xv) Such demonstration should have been inscribed in the Inspection Report itself, since, in accordance with the provision of no. 3 of article 268 of the CRP, all administrative acts lack express and accessible reasoning when they affect legally protected rights or interests;

xvi) More than being considered in isolation, the elements invoked by the Inspection Report and the final decision of partial deferment of the Administrative Appeal to apply a proportionality must be stated in such a manner as to construct a global, solid and coherent framework, capable of permitting with reasonable certainty the conclusion of misinterpretation of the laws by the Applicant;

xvii) In light of the TCA's failure to comply with the special duty of reasoning to which the law obligates it, all the statements of assessment in question, as well as the final decision of partial deferment of the Administrative Appeal, should be considered unsubstantiated, under no. 2 of article 153 of the Administrative Procedure Code ("APC") – applicable by virtue of paragraph d) of article 2 of the TCPT – as well as of the aforementioned articles, and, consequently, by reason of a defect of form, be annulled;

xviii) Additionally, the acts of assessment must be annulled by reason of error as to the factual and legal presuppositions;

xix) With respect to maintenance and conservation expenses, they now fulfill the conditions for being accepted under article 41 of the Personal Income Tax Code;

xx) Having in consideration that the Personal Income Tax Code does not define what is understood by 'maintenance and conservation expenses', the interpretation of such concept should be effected having as reference the provision of article 11 of the LGT;

xxi) It appears settled the doctrinal position that defends that the ratio underlying the concept of 'conservation expenses' consists in accepting for purposes of deductibility under article 41 of the Personal Income Tax Code all conservation expenses, whether they are ordinary or extraordinary;

xxii) This is also clearly the position of the existing case law regarding this concept, as results from Arbitral Decision no. 435/2014, of November 10, 2014;

xxiii) As regards specifically the concept of 'maintenance expenses', the Applicant's understanding is that the TCA seeks to unjustifiably restrict the concept thereof;

xxiv) This concept of 'maintenance expenses' is not imported from any other branch of Law, so for the interpretation thereof, the general principles of interpretation and application of laws should be put into practice;

xxv) Thus, the interpretation of such concept should be effected in accordance with article 9 of the Civil Code, the fundamental norm to provide legislative guidance for such task;

xxvi) The fact that the 2012 and 2013 version of article 41 of the Personal Income Tax Code does not exemplify 'maintenance expenses' does not, per se, make this concept more restrictive;

xxvii) The combined interpretation of articles 8 and 41 of the Personal Income Tax Code cannot fail to heed the criteria of prudence and prognosis that should guide (and do guide) a good manager, nor can it fail to respect the economic reality of the activity in which the Applicant is engaged;

xxviii) Thus, should be considered 'maintenance expenses' all those that are necessary for the maintenance of the properties and its economic activity, so will be those which, having sufficient proof, have a direct causality with the property, in the economic sense thereof, that is, that of generating income;

xxix) If it were otherwise, we would be faced with a blatant injustice by violation of the principle of contributory capacity, which results that Category F aims to tax the net income deriving from rents, that is, rents minus the expenses incurred and crucial for obtaining those rents;

xxx) The expenses that are not accepted for tax purposes in the final decision of partial deferment of the Administrative Appeal fall within the concept of 'maintenance and conservation expenses', proving to be indispensable for the obtaining of income subject to tax, under the interpretation of article 41 of the Personal Income Tax Code;

xxxi) The Applicant considers it to have been demonstrated that the expenses not accepted for tax purposes in the final decision of partial deferment of the Administrative Appeal are expenses that are documented proof, whose description of the invoices and respective supporting documents are clear and are effectively maintenance and/or conservation, under article 41 of the Personal Income Tax Code, reason for which they should have been considered deductible by the TCA;

xxxii) Furthermore, under the Inspection Report, the Applicant should have applied a proportionality coefficient to expenses deductible under article 41 of the Personal Income Tax Code on the basis of the number of days of rental of the property, with 74 days in 2012 and 85 days in 2013 being specifically at issue;

xxxiii) This situation would be caricaturally comparable to a hotel unit, which could only deduct all of its expenses proportionally to the number of rooms and nights rented;

xxxiv) The TCA's pretension to want to make prevail its manifestly illegal interpretation of the tax norms is, in light of constitutional principles, illegal;

xxxv) In defending that the application of a proportionality coefficient of maintenance and conservation expenses vs. income should be applied to the Applicant, the TCA is based on illegal reasoning, as was considered in Arbitral Decision no. 201/2015-T, of December 7, 2015 or in Arbitral Decision no. 294/2015-T, of January 21, 2016;

xxxvi) The Applicant considers it to have been demonstrated that the application of a proportionality method does not possess any legal support, and may only be considered a mere academic exercise, demonstrative of some lack of knowledge of the functional reality of a property devoted to economic exploitation, reason for which no proportionality coefficient should be applied, as regards expenses deductible under article 41 of the Personal Income Tax Code;

xxxvii) In light of the foregoing, the Applicant requested the annulment in its entirety of the corrections pertaining to IRC allegedly due by reason of the application of a proportionality coefficient and, consequently, of the acts of assessment and the final decision of partial deferment of the Administrative Appeal associated with them;

xxxviii) As regards the assessment of compensatory interest, the same resides in the presupposition, provided for in the law, that the delay in the assessment of the tax is due to a fact imputable to the taxpayer (cf. no. 1 of article 35 of the LGT), and the Inspection Report does not refer to the existence of fault imputable to the Applicant;

xxxix) In proceeding thus, the Inspection Report disregards the relevance of the Applicant knowing, in its full extent, the reasons for the additional burden imposed on it, as well as of appreciating its legality;

xl) It is thus necessary to conclude there is an absence of reasoning of the assessment of compensatory interest, in particular as regards the fault of the Applicant in the supposed delay in the assessment of tax, which violates the provision of no. 1 of article 35 and nos. 1 and 2 of article 77, both of the LGT, as well as the provision of no. 3 of article 268 of the CRP;

xli) Finally, the Applicant requests that, should the present petition be granted, it be paid, under articles 43 and 100, both of the LGT, the respective indemnifying interest for undue payment of the tax obligation, including the respective compensatory interest.

  1. Notified for such purpose, the TCA, now Respondent, presented its response, in which it defended itself by impugnation, and the grounds invoked by it may be summarized as follows:

i) The Applicant alleges facts that serve as foundation and that substantially configure the alleged legal position it claims, without proving it, and it falls to the party that alleges certain facts to provide demonstration of the reality thereof;

ii) Proof of facts is not made by insistence nor even with mere allegations and suppositions, but by its demonstration, which must be based above all on reality;

iii) On the lack of reasoning, the Applicant's thesis has no basis whatsoever, and it cannot claim to see or make the Tribunal believe that the assessments, statements of assessment and statements of account adjustment that it received are isolated in the procedure, since it knows perfectly well that all notifications made to it were as a consequence of an inspection procedure;

iv) With respect to the reasoning of administrative acts, the same are reasoned when, from the motivation adduced, they prove apt to reveal to a normal recipient the factual and legal reasons that determine the decision, enabling it to react effectively by the legal means against its injurious nature;

v) It is demonstrated that the Applicant understood perfectly the sense and scope of the assessment on which rests the present request for arbitral pronouncement, as results from the very juridical-argumentative exercise it performs in its very extensive excursus;

vi) It is not possible to affirm that a certain act is unfounded when, in the concrete case, the contextual motivation permitted its recipient to know the factual and legal reasons that led the Respondent to take the decision in question, with that sense and content;

vii) Even if the act sub judice suffered deficiencies at the level of the reasoning discourse – which is only by mere academic hypothesis admitted – such deficiencies would degrade into mere non-essential irregularities, since, even so, such deficiencies permit the full clarification of its recipient, enabling it to rise up against them, as, moreover, the Applicant did by means of the present request for arbitral pronouncement;

viii) And even if it were understood that the act suffered from any omission of reasoning, which is not conceded, the Applicant would always have at its disposal the procedure provided for in article 37 of the TCPT;

ix) Not having the Applicant availed itself of that faculty conferred by law, it is incumbent to conclude that the act sub judice contained, and contains, all elements necessary for its full comprehension and that the heralded vice from which it eventually suffered was remedied;

x) Also with respect to the invoked violation of article 41 of the Personal Income Tax Code, reason does not side with the Applicant, as is widely demonstrated in the information that grounded the decision of the correction proposed and the dismissal of the Administrative Appeal to which reference is made;

xi) Deductible to real estate income are documented expenses, necessary and directly linked to the obtaining of that same income, provided that they are borne by the taxpayer itself;

xii) And those are the expenses that are understood as necessary to produce the real estate income classified and to keep intact the respective source of production, that is, the properties subject to rental;

xiii) As maintenance expenses are considered, in particular, those borne with energy and maintenance of elevators, escalators and cargo lifts, doormen, cleaning, energy for lighting, heating or central air conditioning and property insurance premiums, while as conservation expenses are considered those carried out with works intended to maintain a building in the existing conditions at the date of its construction, reconstruction, enlargement or alteration, in particular the works of restoration, repair and cleaning;

xiv) Conservation, maintenance and IMI expenses paid with respect to property rented for a few months - since, for purposes of taxation under Category F of the Personal Income Tax Code, attention is paid to net income obtained, i.e., to rents received deducted from expenses and charges borne to produce the real estate income classified and to keep intact the respective source of production, that is, the properties subject to rental, such expenses should be proportionally considered on the basis of the number of months of rental;

xv) In the absence of income, i.e., in the absence of gross income, no charge whatsoever borne can be considered, because, in such a situation, there would be no determination of net income subject to taxation under Category F of the Personal Income Tax Code;

xvi) In that same order of ideas and in a situation of partial rental, that is, in which the property is rented only during part of the year, only may be considered as eligible for purposes of the provision of article 41 of the Personal Income Tax Code the expenses that, proportionally, prove attributable to the number of months of rental;

xvii) The correction of deductible amounts with reference to the expenses that actually fall within the deductible charges for this type of income took into consideration that the property was occupied only part of the year, and not all expenses could be deducted, so the number of nights in which the property was occupied by customers was accounted for;

xviii) For purposes of taxation under Category F of the Personal Income Tax Code, it will be necessary to heed net income obtained, that is, gross income obtained, deducted from expenses and charges borne to produce the real estate income classified and to keep intact the source of production of income, that is, the property in question, which implies the existence of a correspondence and proportionality of charges and expenses borne;

xix) Not all and any charges whatsoever borne by the Applicant;

xx) Expenses relating to conservation, maintenance and IMI paid with respect to the property, provided they are properly documented and should be considered as costs, must contain a relationship and or correspondence with the obtaining of the real estate income classified for purposes of Category F of the Personal Income Tax Code;

xxi) In the periods in which the property was not occupied and, for that reason, did not produce any real estate income, there being no gross income to which any charge borne might be deducted, so, in the circumstance, it will not be possible to determine net income subject to taxation under Category F of the Personal Income Tax Code;

xxii) Only through consideration of the occupancy coefficient was it possible for the tax administration to establish an adequacy and proportionality between the gross real estate income and the charges and expenses deductible for purposes of Category F of the Personal Income Tax Code so as to thus obtain net real estate income;

xxiii) Any other interpretation that does not uphold the position set forth in the TIR, and which is the interpretation of the TCA, frontally violates the principle of equality (article 13 of the CRP) and, likewise, that of contributory capacity (104 of the CRP), by discriminating those who rent a property for scant days, deducting all and any expenses provided for in article 41 without any limit, from those who, using the property constantly and throughout the entire fiscal year for rental, find themselves in the contingency of being placed on the same level of contributory capacity (which is not at all equal) as those others;

xxiv) The interpretation given by the TCA and which moreover is set forth in the filing instructions of MOD. 3 which expressly refers to that in section 5 of Annex F «... the expenses actually borne and paid in the year by the taxpayer should be declared, for the period in which the property was rented, in particular those that pertain to conservation and maintenance of the property, condominium expenses, taxes and municipal levies. The value of the Municipal Property Tax to be mentioned is that which was paid in the year to which the income pertains.» (cf. Doc. 1 which is now attached and is given as entirely reproduced for all legal purposes) is the only one that invokes the principles of equality and contributory capacity in an optical of tax justice;

xxv) In the case at hand, and as results from the decision set forth in both the TIR, and in the dismissal of the administrative appeal, to which reference is made and which is given as entirely reproduced, there are at issue not only the nature of expenses borne, but also their quantification;

xxvi) Article 41 of the CIRS enshrines the express deduction of the value of IMI "(…) which is assessed on the value of properties or part of properties whose income has been classified", the norm itself establishing a direct cause between the classified income and the expense borne, in the measure that such source generating income, as long as it was, had associated with it a cost;

xxvii) In that measure, and with due respect, it makes no sense that a property that generated income for only a few months be associated with an annual expense;

xxviii) Given this, it is evident the legal conformity of the tax act object of the present arbitral petition, and it cannot be considered that there has been error imputable to the services in the issuance of the assessment in question, a condition indispensable for condemnation in the payment of indemnifying interest;

xxix) Thus, it requested that the request for arbitral pronouncement be judged as without merit, the tax act of assessment remaining in the legal order and the respondent entity being absolved accordingly from the petition.

  1. By means of an arbitral order of 24/10/2017, the Tribunal determined the extension of the period for pronouncement of the arbitral decision, for a period of 2 (two) months, under the provision of no. 2 of article 21 of the LFTA, setting December 11, 2017 as the date for the decision.

  2. In the order referred to in the previous point, it was also dispensed with the holding of the meeting alluded to in article 18 of the LFTA, as additional evidence production was not requested, with the Parties being notified to, if they wish, present written submissions.

  3. After the issuance of that order, the Parties said nothing, having presented no submissions.

II. Preliminary Matters

The tribunal is competent and is regularly constituted.

The parties enjoy legal personality and judicial capacity, being duly represented.

The procedural means is appropriate, being possible the cumulation of petitions, in light of both the identity of the contested acts and the cause of action and the petitions formulated by the Applicant, under the provision of article 3, no. 1, of the LFTA.

No exceptions or preliminary matters were invoked that would prevent the consideration of the merits of the case.

III. Matters of Fact Considered Established

In light of the evidentiary elements brought before the tribunal and the factuality accepted by both Parties and not contested, the Tribunal considers as proven, with relevance to the final decision, the following facts:

A) The Applicant was subject to an inspection procedure of an internal nature, conducted by the Tax Inspection Services of the Finance Office of Faro in compliance with Service Orders nos. OI2015.../..., of 18/09/2015, which was of partial scope in the context of IRC and focused on the tax periods of 2012 and 2013;

B) From that inspection procedure resulted the realization of arithmetic corrections, in the amounts of € 32,802.95 and € 31,005.46, relative, respectively, to the tax periods of 2012 and 2013;

C) In the Final Tax Inspection Report that was prepared within the scope of said inspection procedure, the corrections then effected in the context of IRC were justified, in what is now relevant, in the following manner:

i) In the years 2012 and 2013, income and expenses related to the property of which the Applicant is the owner were declared by the Applicant (evidenced in Table no. 1, reproduced on page 5 of the Report):

ii) In the years 2012 and 2013, the rents received corresponded to the following invoices (evidenced in Tables nos. 2 and 3, reproduced respectively on pages 5 and 6 of the Report):

iii) In Annex 1 to the Final Tax Inspection Report "the expenses borne are itemized, having been prepared on the basis of documents provided by the taxpayer" (page 6 of the Report);

iv) The amounts received as rent by the Applicant "are considered real estate income (category F of the Personal Income Tax Code, article 8)" (page 6 of the Report);

v) "The expenses susceptible of being deductible to real estate income are provided for in article 41 of the CIRS "To gross income referred to in article 8, are deducted the expenses of maintenance and conservation that are incumbent on the taxpayer, borne by it and are documented proof, as well as the municipal property tax that is assessed on the value of the properties... whose income has been classified" - version in force in 2012" (pages 6 and 7 of the Report);

vi) "In Annex 1, column 'Expenses classifiable under article 41 of the CIRS', are identified the expenses susceptible of being deductible to real estate income" (page 7 of the Report);

vii) Since it is a property rented during certain periods, "the deductible expenses should be considered proportionally on the basis of the number of days of rental, that is, 74 days in 2012 and 85 in 2013, as results from table no. 2, which corresponds to 20.22% (74/365) and 23.29% (85/365)" (page 7 of the Report);

viii) Applying such percentages to the values considered under article 41 of the CIRS, we have the following (evidenced in Table no. 4 reproduced on page 7 of the Report):

ix) The net income of category F, in the amounts shown in Table no. 4 (evidenced on page 8 of the Report) "corresponds to the taxable matter in the context of IRC":

x) It was thus determined, IRC to be paid additionally in the amount of € 4,920.44, in the year 2012, by application of the rate of 15%, under paragraph f) of no. 4 of article 87 of the CIRC and, in the year 2013, in the amount of € 7,751.37, by application of the rate of 25% in 2013, under the same provision;

xi) The Tables in Annex 1 of the Report evidence the following information:

D) There were issued in the name of the Applicant the statement of assessment of IRC no. 2016..., of January 28, 2016, the statement of assessment of compensatory interest no. 2016... and the statement of account adjustment no. 2016..., both dated February 1, 2016, with reference to the period of 2012, as well as the statement of assessment of IRC no. 2016..., of January 28, 2016, the statement of assessment of compensatory interest no. 2016... and the statement of account adjustment no. 2016..., both of February 2, 2016, with reference to the period of 2013;

E) The Applicant proceeded, on March 29, 2016, to payment of the tax and compensatory interest determined in those assessments, in the total amount of € 5,439.71 (cf. Document no. 5 of the Administrative Appeal attached as Document no. 1 of the arbitral petition);

F) The Applicant filed, with the Finance Service of ..., an Administrative Appeal against the acts of assessment of IRC of 2012 and 2013 identified in point D) of the proven facts (cf. entry stamp of July 6, 2016);

G) By means of Official Communication no. ..., of October 17, 2016, from the Finance Office of Faro, the Applicant was notified of the Draft Dismissal of said Administrative Appeal, with the grounds stated therein (Cf. Doc. no. 2 attached with the arbitral petition);

H) By Official Communication no. ..., of November 24, 2016, from the Finance Office of Faro, the Applicant was notified of the final decision rendered in the administrative appeal process referred to in points F) and G) of the proven facts, with the decision of partial deferment projected being maintained (Cf. Doc. no. 2 attached with the arbitral petition);

I) Following the decision referred to in point H) of the proven facts, acts of assessment of IRC and Compensatory Interest nos. 2016... and 2016..., were issued, with reference, respectively, to 2012 and 2013.

No other facts with relevance to the final decision were identified.

V. Reasoning of the Decision

Before analyzing the merits of the contentions of the parties in confrontation here, it is essential to note that the Tribunals, including here Arbitral Tribunals, do not have to consider all arguments presented by them, as is ascertained by way of example in the Judgment of the Plenary of the 2nd Section of the ATS, of 07/06/1995, rendered in appeal no. 5239.

As is concisely stated in that judgment "Not being to be confused the concept of 'matters' with that of 'arguments' or 'reasons', the tribunal, while it must 'resolve all matters that the parties have submitted for its consideration', is not bound to consider all arguments used by the parties, just as, obviously, it is not prevented from, in the decision, using considerations not produced by them."

Indeed, the matters invoked by the parties are not confused with the arguments, the reasons or the motivations produced. Matters, in particular for purposes of the provision of no. 2 of article 608 of the Code of Civil Procedure, are only those of substance and that integrate the matter of decision, that is, those that are related to the petition, the cause of action and the exceptions (see in this sense the Judgment of the Supreme Court of Justice, of 29/11/2005, rendered in appeal no. 05S2137 or the Judgment of the Central Administrative Tribunal of the South, of 25/09/2012, rendered in appeal no. 05073/11).

And not only is the Tribunal not bound to pronounce upon all arguments presented by the parties, whether of fact or of law, but is also not, nor could be in face of the principle of inquisitorial procedure, subjugated to those same arguments or matters. The Tribunal enjoys equally freedom as to the course and the cognitive iter to use for the pronouncement of the decision on the merits.

Thus, having considered what is set forth above, what the parties brought before the tribunal and the nucleus of the argumentation used, whether in the arbitral petition and the corresponding response presented by the Respondent, the Tribunal considers that the matters of law to be decided are the following:

i) Lack of reasoning of the acts of assessment;

ii) Illegality of the acts of assessment, in light of the norms that define the rules of deductibility of expenses related to real estate income, in particular article 41 of the Personal Income Tax Code and the other legal-tax principles applicable.

VI. On the Law

A. On Lack of Reasoning

As has been ascertained, the Applicant points to the acts of assessment that it now contests, as the first vice, their lack of reasoning.

Let us then examine this.

In order for one to be able to make an adequate analysis of this vice, as it is alleged by the Applicant, it is important to evidence that the latter was subject to the internal inspection procedure to which reference was made above, within the scope of which corrections were made in the context of IRC.

It was also as a consequence of this tax inspection procedure that the acts of assessment of IRC of 2012 and 2013, now placed in question, were issued by the TCA.

By not agreeing with their issuance, the now Applicant filed against such acts of assessment the competent Administrative Appeal, already decided definitively, from which it appears evident that the issuance of new acts of assessment has already resulted, with reference to the years in question (identified in point I of the Proven Facts).

The question that arises is whether the elements of fact and of law, inherent in the acts of assessment under analysis - not in those that were subsequently issued, nor in the decision rendered in the context of the Administrative Appeal - are sufficient for us to affirm that such acts are, duly and sufficiently, reasoned.

For that, we will thus need to analyze the sufficiency and adequacy of the grounds that are set forth in the Final Tax Inspection Report prepared with respect to the years 2012 and 2013.

Now, first of all, a summary is made in that Report of the income and expenses declared by the Applicant, in the years in question and with reference to the property of which it is the owner (see Table no. 1, reproduced on page 5 of the Report).

Next, reference is made, identifying summarily, the invoices that were issued by the Applicant corresponding respectively to the rents received by it (see Tables nos. 2 and 3, reproduced respectively on pages 5 and 6 of the Report).

Beyond that, the Inspection Services consider that, because it is a property rented during certain periods, "the deductible expenses should be considered proportionally on the basis of the number of days of rental, that is, 74 days in 2012 and 85 in 2013, as results from table no. 2, which corresponds to 20.22% (74/365) and 23.29% (85/365)" (page 7 of the Report).

The application of those proportionality coefficients is then made and the value of expenses considered as classified under article 41 of the Personal Income Tax Code is obtained, which amounted to € 1,936.04 and € 4,992.06, respectively for the years 2012 and 2013.

The application of this methodology to the tax facts and evidentiary elements that are to have been presented by the Applicant, in the context of inspection, is found, in reality and as has been alluded, set forth in the Tables that compose Annex 1 of the Final Tax Inspection Report.

In fact, and as the Inspection Services themselves expressly state, it is in Annex 1 of the Final Tax Inspection Report that "the expenses borne are itemized, having been prepared on the basis of documents provided by the taxpayer" and, the Tribunal adds, the expenses that, in the TCA's understanding, may be classifiable under the norm provided for in article 41 of the Personal Income Tax Code.

Now, apparently and according to what results from the analysis of those Tables, the Inspection Services considered that, in the year 2012, from the list of expenses declared by the taxpayer, only € 9,575.55, in 2012, and € 21,436.49, in 2013, were considered classifiable under the mentioned article 41 of the CIRS.

However, the Final Tax Inspection Report says nothing regarding the concrete reasons why it restricted the set of expenses to these and not to others.

The only reference made to this matter in that Report is the following: "The remaining expenses mentioned in the invoices are not deductible, either when the description does not permit classification of the asset/service provision supported, or when they are current expenses and not maintenance and conservation expenses."

But the judge is left without knowing which of the invoices that were presented subsume to one or the other situation, that is, when they were rejected by impossibility of classification of the asset or of the service provision or by being current expenses (as opposed to maintenance and conservation expenses). And, more relevantly still, the reasons why it was so understood.

The TCA only makes that correspondence already in the context of the administrative appeal procedure, after the Applicant proceeded to the attachment of the invoices. And note that the analysis made by the Applicant itself, in the context of the appeal (see point 18 of its respective argument), constitutes a mere arithmetic exercise and that seeks to compute the amounts corrected by the TCA, but contributes nothing regarding the grounds that, intrinsically, underlay each one of the categories of corrections.

The Tribunal's role is, in a first phase, to analyze the facts that are placed before it for analysis and only then to make the correlation of that analysis with the arguments brought before the tribunal by the parties. And the truth is that the Tribunal was left without knowing, or even understanding, the logical reasoning that the Inspection Services follow, to define the limits between the expenses classifiable and not classifiable under the norm provided for in article 41 of the Personal Income Tax Code.

And note that the Tribunal did not even need to make any judgment as to the legality of the procedure of proportional allocation of such expenses, in light of the actual occupancy of the property. To be able to do so – and let it be said, for informational purposes only, that the position of the TCA on this matter – it would have been necessary, before all, that it had succeeded in understanding that cognitive course, which led to excluding from tax deductibility determined expenses.

The TCA could have attached to the Report the invoices it considered as not classifiable under the legal norm, justifying the reasons why, in concrete, it understood that the same would have to be excluded – by not being accepted – from the deductible expenses in the years 2012 and 2013. This is, generically, the procedure that is habitually followed in the context of inspection, instructing the TCA the Inspection Report with all elements analyzed by it, so that the taxpayer may make the correspondence between the corrected evidentiary elements and the respective grounds.

As has been stated, only in the context of the administrative appeal procedure, in reality, is a more exhaustive justification of the corrections effected in the context of inspection presented. But this is evident post hoc reasoning, as will be ascertained.

And it may be added that, for however much interpretive and analytical effort that it made, and did make, the Tribunal has difficulty in understanding the "deficiencies" that the TCA points to the Applicant, in the draft decision of the administrative appeal, with respect to the non-presentation of documents in the context of tax inspection, in the measure that, as is well stated therein, the elements previously provided by the Applicant served precisely as the basis for the preparation of Annex 1 of the Inspection Report. Whereby we are left without knowing which evidentiary elements would be lacking and that, effectively and in a decisive manner, could contribute to the alteration of the corrections effected.

Now, the case law has since always upheld the understanding that the administrative act – here included the act in the matter of tax – is sufficiently reasoned when from the same it is possible to extract the respective cognitive course. This is also what results from the provisions of articles 63 of the Complementary Regulation of the Tax Inspection Procedure, 77, no. 1, of the General Tax Law and 153, no. 1, of the Administrative Procedure Code.

In the words of the Administrative Court of Cassation (ATS), rendered in the Judgment of 11.12.2007, rendered in appeal no. 615/04, "the degree of reasoning must be adequate to the concrete type of the act and the circumstances in which the same was performed, so as to satisfy the divergence existing between the position of the Tax Administration and that of the taxpayer."

Still according to the same ATS, in the Judgment of 10.02.2010, rendered in case no. 01122/09, it was considered that "the reasoning of the administrative act is a relative concept that varies according to the type of act and the circumstances of the concrete case, but is only sufficient when it permits a normal recipient to perceive the cognitive and evaluative itinerary followed by the author of the act to render the decision, that is; when that recipient may know the reasons why the author of the act decided as it did and not in a different manner, so as to be able to set in motion the administrative or contention mechanisms of impugnation."

Also by way of example, cite the Judgment of the Central Administrative Tribunal of the North, of 15.02.2012, rendered in case no. 00881/08.0BEBRG, which aligned in the same direction, considering that "If from the impugnation of the assessment it results that the taxpayer perceived the reasons that determined the act, then this should be considered reasoned."

The duty of reasoning of administrative or tax acts aims essentially, on the one hand, to acquaint the respective recipient of the reasons or the motives that led to the taking of a decision in a determined sense and, on the other hand, to permit control over the legality of the decision and over the validity of the motives that underlie a determined concrete decision.

"(...) the imperative of express reasoning (...) thus performs, typically, a role of functional guarantee, with the pretension of assuring the rationality and the controllability of the characteristic moments of the administrative function, those in which the bodies of the Administration take decisions of authority that produce juridical modifications in the external world (...)" (cf. JOSÉ CARLOS VIEIRA DE ANDRADE, The duty of express reasoning of administrative acts, Coimbra, 1992, p. 215).

Given this and as is evident from all that is set forth above, it appears evident that the acts of assessment now contested do not comply with the legally defined requirements. The Inspection Report in which the corrections are set forth that were at the origin of their issuance is not, duly and sufficiently, reasoned.

A different situation we would have if, perchance, the object of the present arbitral petition were the acts of assessment of IRC issued as a consequence of the Administrative Appeal filed by it and that reflect the decision rendered therein. In that case, it could be affirmed that the reasoning would be contemporaneous with the act.

As was well decided in the recent judgment rendered in arbitral case no. 274/2016-T, on February 9, 2017, decision in which Counselor Lopes de Sousa served as reporter, "In a contentious proceeding of mere legality, as is that provided for in the LFTA for arbitral tribunals functioning in CAAD, in which only the declaration of illegality of acts of the types provided for in paragraphs a) and b) of no. 1 of its article 2 is sought, the legality of the impugned act must be assessed as it occurred, with the reasoning used in it, other possible reasoning not being relevant."

And continuing to follow that arbitral decision: "On the other hand, since knowledge of the reasoning is necessary to assure with effectiveness the right of contentious impugnation of injurious acts, assured by article 268, no. 4, of the CRP, to assess the sufficiency of the reasoning, only the tenor of the impugned act and the references it contains expressly must be heeded, as is required by no. 3 of the same article, in which it is established that 'administrative acts are subject to notification to the interested parties, in the form provided for by law, and lack express and accessible reasoning when they affect legally protected rights or interests'."

Thus, as is settled case law, the relevant reasoning is only that contemporaneous with the act, that precedes or accompanies the act and that is contained in it directly or by reference, being irrelevant post hoc reasoning, including that which is invoked in the process of contentious impugnation.

In the case at hand, the reasoning of the impugned assessments, beyond what is contained therein itself, is that which is contained in the Tax Inspection Report."

Making the parallel with the situation at hand, it was likewise considered in that decision as follows, which is transcribed:

"In the case at hand, the Applicant defends that

– both as regards the swimming pools, and as regards the athletics track, and as regards the remaining sports pavilions, the Tax Administration, in its report, does not reason nor explain why the services provided by the other market operators enter into competition with the services provided by the applicant;

– either because it does not indicate which concrete services are provided in competition;

– in which similar physical conditions such services are provided;

– whether or not other market operators are or are not exempt entities,

It is manifest that the Applicant is correct as to the insufficiency of the Tax Inspection Report, on which the impugned VAT assessments rest, as to the points it refers, on this matter of the possibility of distortion of competition, which is essential to support the assessments.

From the outset, the 'hotel in the city' nor the 'other in the parish of ...' nor the 'gyms (at least two, with indoor swimming pool)' are identified, so that, although the Applicant attempts to formulate guesses about the entities to whom they would relate, it cannot be failed to conclude that one is in the presence of the use of vague expressions, which do not satisfy the requirements of reasoning.

On the other hand, the Tax and Customs Authority does not clarify which characteristics the services provided by each of the entities it understood to be competitors have nor what the prices of the services provided are, nor why it understood that there was a possibility that the exemption practiced by the Applicant could provoke distortion of competition.

To be able to conclude as to the existence of distortion of competition it would be necessary to know the concrete services provided and prices practiced by the entities that the Tax and Customs Authority considers competitors, since they may be distinct services with distinct prices, intended for different types of public. In the case at hand, it resulted from the evidence produced that none of the swimming pools in the council of ... have the characteristics of those of the Applicant nor is there another athletics track, so the reason why the Tax and Customs Authority understood that the provision of services by the Applicant could provoke distortion of competition is not explained.

Beyond that, to demonstrate that there exists a distortion of competition caused by the VAT exemption that the Applicant applied it would be necessary to clarify whether the other entities that the Tax and Customs Authority may have considered competitors did not practice exemption for similar services, since if all practiced exemption, no distortion would be related to the application of the exemption by the Applicant."

That is, and returning to the case sub judice, we will say that also in this situation the TCA did not specify, identifying in the Tax Inspection Report, the reasons why it considered, in concrete, that the expenses could not be classified under the norm set forth in article 41 of the Personal Income Tax Code, nor did it bring into the inspection procedure the evidentiary elements supporting its understanding. Only is it known that determined expenses, embodied in determined invoices (many times not even identified in Annex 1 of the Report), with a determined description, cannot be qualified for purposes of their deduction.

As has been abundantly stated, only within the scope of the subsequent gracious procedure would the TCA come to disclose a bit more of the grounds that, in its understanding, would justify the non-deductibility, in concrete, of certain expenses.

And without knowing, in concrete, which invoices and descriptions were not accepted, with the indication of the correspondence between each invoice and the respective ground for its non-classification in law, was not the Applicant, and in that measure the judge, in conditions to understand the cognitive iter that presided over the corrections effected, at the moment of the issuance of the act of assessment.

A final reference to the argument advanced by the TCA in its Response, that the Applicant should have availed itself of the legal mechanism provided for in article 37 of the Code of Procedure and Tax Process, requesting notification of the lacking reasoning.

We understand, however, that, if the taxpayer does not resort to this mechanism, the eventual vices of the act of assessment are not remedied, at least because article 37 of the Code of Procedure and Tax Process only aims to remedy eventual vices of the notification of the assessment and not of the latter itself.

In this sense, see the Judgment of the Administrative Court of Cassation, of November 21, 2012, rendered in case no. 0736/12, in which it was understood in unequivocal form that "article 37 only has to do with the notification of acts, being intended to establish the consequences of deficiencies of notifications and not the regime of vices of notified acts, so that within the scope of article 37 the Administration may only supply the deficiencies of notification, but not those of the notified act." Whereby, as is stated in this judgment: "No consequences as to the validity or invalidity of the notified act may be extracted from the non-use of the faculty provided for in no. 1 of article 37 of the TCPT, since article 37 only has to do with the notification of acts, being intended to establish the consequences of deficiencies of notifications and not the regime of vices of notified acts, so that within the scope of article 37 the Administration may only supply the deficiencies of notification, but not those of the notified act."

Moreover, Professor RUI MORAIS[1] understands on this matter that the procedure contained in that article 37 of the Code of Procedure and Tax Process does not even enable the TCA to complement or supply failings in the reasoning of the tax act, since this must necessarily exist at the date of notification, under penalty of post hoc reasoning.

The Tribunal does not fully share this position, but considers that the taxpayer, who refrains from using the procedure in question, cannot, in the context of a future gracious or judicial proceeding, in which the legality of the act of assessment is discussed, invoke the lack of efficacy of the latter, embodied in its notification, but cannot be prevented from invoking the lack of reasoning of the tax act of assessment itself. Under penalty, for example, of violation of the principle of effective judicial protection, constitutionally provided for in article 20 of the Constitution of the Portuguese Republic.

In light of the foregoing, it is verified that the acts of assessment of IRC and Compensatory Interest now contested suffer ab initio from the vice of lack of reasoning, embodied in the insufficiency of the Inspection Report, the Tribunal considering that this vice is not susceptible of being supplied subsequent to the issuance of the acts of assessment themselves.

Thus, the illegality is declared of the acts of assessment in question, pertaining to IRC of 2012 and 2013 and, likewise, of the decision of partial deferment rendered in the process of Administrative Appeal relative to such acts, by violation of the provision of articles 77 of the General Tax Law, of articles 152 and 153 of the Administrative Procedure Code, of article 268, no. 3, of the Constitution of the Portuguese Republic and, finally, of article 36 of the Code of Procedure and Tax Process.

In light of that, the analysis of the remaining vices and illegalities pointed to by the Applicant, in particular the violation of the provision of article 41 of the Personal Income Tax Code, is rendered unnecessary.

B. On the Payment of Indemnifying Interest

As was demonstrated in the tribunal, the Applicant proceeded to payment of the amount of tax assessed with reference to the tax years of 2013 and 2013, here at issue.

In this manner, having been given reason to the Applicant, within the scope of the present arbitral petition, recognizing the illegality of the procedure adopted by the TCA and, in consequence, the illegality of the acts of assessment in question, the Applicant will need to be reimbursed that amount, increased by the respective indemnifying interest legally owed, for the time in which the Applicant found itself deprived of that sum.

It provides, in that sense, article 43 of the General Tax Law that indemnifying interest is owed to the taxpayer when it is determined, in the context of Administrative Appeal or Judicial Impugnation, that there was error imputable to the services from which results payment of the tax liability in an amount superior to that owed.

Now, the Central Administrative Tribunal of the South, in the Judgment of 03/05/2006, rendered in case no. 537/05, came to clarify what should be understood by error imputable to the services: "The indemnifying interest in article 43 of the LGT are owed whenever it can be affirmed, as in the case sub judice, that there occurred error imputable to the services demonstrated, at once and without need of more, by the success of administrative appeal or judicial impugnation of the corresponding assessment." (emphasis of the Applicant).

Such norms and their respective consequences are applicable in the context of an arbitral petition, being encompassed, within the scope of the powers of the arbitral tribunal, the possibility of decision as to this matter.

This was also understood in the judgment of November 3, 2016, rendered in case no. 292/2016-T:

"In harmony with the provision of paragraph b) of article 24 of the LFTA, the decision arbitral as to the merits of the pretension from which there is no appeal or impugnation binds the Tax Administration as of the end of the period provided for appeal or impugnation, and this, in the exact terms of the success of the arbitral decision in favor of the taxpayer and until the end of the period provided for execution spontaneous of the sentences of the tax judicial tribunals, must reestablish the situation that would exist if the tax act object of the arbitral decision had not been practiced, adopting the acts and operations necessary for the effect", which is in harmony with what is established in article 100 of the LGT [applicable by virtue of the provision of paragraph a) of no. 1 of article 29 of the LFTA] which establishes, that "the tax administration is obliged, in case of full or partial success of administrative appeal, judicial impugnation or appeal in favor of the taxpayer, to the immediate and complete reconstitution of the legality of the act or situation object of the litigation, including the payment of indemnifying interest, if it be the case, as of the end of the period of execution of the decision."

Although article 2, no. 1, paragraphs a) and b), of the LFTA uses the expression "declaration of illegality" to define the competence of arbitral tribunals functioning in CAAD, making no reference to condemnatory decisions, should it be understood that there are comprised in its competences the powers that in a judicial impugnation proceeding are attributed to tax tribunals, this being the interpretation that is in harmony with the sense of the legislative authorization on which the Government based itself to approve the LFTA, in which it is proclaimed, as the first directive, that "the tax arbitration proceeding must constitute an alternative procedural means to the judicial impugnation proceeding and to the action for the recognition of a right or legitimate interest in tax matters."

The judicial impugnation proceeding, despite being essentially an annulment proceeding of tax acts, admits the condemnation of the Tax Administration in the payment of indemnifying interest, as is inferred from article 43, no. 1, of the LGT, in which it is established that "indemnifying interest is owed when it is determined, in administrative appeal or judicial impugnation, that there was error imputable to the services from which results payment of the tax liability in an amount superior to that legally owed" and from article 61, no. 4 of the TCPT (in the version given by Law no. 55-A/2010, of December 31, to which corresponds no. 2 in the initial version), which "if the decision that recognized the right to indemnifying interest be judicial, the period of payment is counted as of the beginning of the period of its spontaneous execution".

In fact and as is concluded in that decision: "(...) no. 5 of article 24 of the LFTA, by saying that 'payment of interest is due, regardless of its nature, in the terms provided for in the general tax law and in the Code of Procedure and Tax Process', should be understood as permitting the recognition of the right to indemnifying interest in the arbitral proceeding. On the other hand, depending the right to indemnifying interest on the right to reimbursement of sums paid indebtedly, which are its basis of calculation, there is inherent in the possibility of recognition of the right to indemnifying interest the possibility of consideration of the right to reimbursement of those sums."

In light of the foregoing, having been given provenance to the pretension of the Applicant, there remain no doubts that indemnifying interest is owed, to be calculated from the date of payment of the tax to effective and complete payment, which interest should be calculated in the terms of the provision of article 43 of the General Tax Law, on the amount effectively paid.

VII. Decision

In light of the foregoing, it is decided to judge as well-founded, as proven, the request for arbitral pronouncement and, in consequence:

i) Declare the illegality of the acts of assessment of IRC and Compensatory Interest in question that constitute the object of the present arbitral petition, for the reasons and with the grounds invoked above, as well as of the decision of partial deferment rendered in the process of Administrative Appeal pertaining to those acts, with the other legal consequences;

ii) From the deferment of the petition, there should result the reimbursement to the Applicant of the amounts indebtedly paid, with reference to the years 2012 and 2013, accompanied by the respective indemnifying interest, computed in the terms of article 43 of the LGT;

iii) Condemn the Respondent in the payment of the costs of the present proceeding.

VIII. Value of the Proceeding

The value of the proceeding is fixed at € 12,541.38, in the terms of the provision of article 97-A, no. 1, paragraph a), of the Code of Procedure and Tax Process, applicable by virtue of the provision of paragraphs a) and b), of no. 1, of article 29, of the LFTA and of no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

IX. Costs

The value of the costs of the proceeding is fixed at € 918.00, in the terms of Table I of the Regulation of Costs of Tax Arbitration Proceedings, to be borne by the Respondent, by reason of the complete failure in the present action.

Notify.

Lisbon, December 11, 2017

The Arbitrator

(Diogo Bonifácio)

[1] "Manual of Procedure and Tax Process", Coimbra, 2012, pages 84 et seq.

Frequently Asked Questions

Automatically Created

What are the requirements for deducting business expenses under Portuguese IRC (Corporate Income Tax)?
Under Portuguese IRC law, business expenses are deductible if they meet the criteria established in article 23 of the IRC Code: they must be incurred or supported to obtain or guarantee taxable income, be properly documented, and not be expressly excluded by law. For maintenance and conservation expenses specifically, article 41 of the Personal Income Tax Code (applicable by reference) accepts both ordinary and extraordinary conservation expenses as deductible. The Tax Authority bears the burden of proof under article 74 of the LGT to demonstrate that expenses do not meet deductibility requirements. The taxpayer must maintain proper documentation (invoices, contracts) evidencing the business purpose and amounts of expenses claimed.
What constitutes a lack of reasoning (falta de fundamentação) in a tax assessment by the Portuguese Tax Authority?
A lack of reasoning (falta de fundamentação) occurs when the Tax Authority fails to provide express, accessible reasoning explaining the factual and legal grounds for its decision, as required by article 77 of the General Tax Law and article 268(3) of the Portuguese Constitution. The reasoning must be sufficient to allow the taxpayer to understand why the act was performed and to enable hierarchical and judicial review. Generic or conclusory statements are insufficient; the TCA must specify concrete facts and legal provisions supporting corrections. When an inspection report disallows expenses without identifying which specific expenses are non-deductible or why, this constitutes insufficient reasoning, potentially rendering the assessment void under article 153(2) of the Administrative Procedure Code.
Can a company resident in Malta challenge Portuguese IRC tax assessments through CAAD arbitration?
Yes, a Malta-resident company with a Portuguese taxpayer number can challenge Portuguese IRC tax assessments through CAAD arbitration under articles 2(1)(a) and 10(1)(a) of Decree-Law 10/2011 (Legal Framework for Tax Arbitration - RJAT). The RJAT allows any taxpayer subject to Portuguese tax jurisdiction to request arbitration for disputes concerning IRC assessments, regardless of their country of residence. The company must have legal interest in challenging the assessment, which exists when the company is the taxpayer identified in the contested assessment acts. Cross-border taxpayers have the same arbitration rights as Portuguese-resident entities, ensuring equal access to alternative dispute resolution mechanisms for tax matters within Portuguese jurisdiction.
What happens when the Tax Authority fails to specify which expenses are non-deductible in an inspection report?
When the Tax Authority fails to specify which expenses are non-deductible in an inspection report, the assessment may be annulled for lack of reasoning (falta de fundamentação). The TCA has a legal duty under article 77 of the LGT to provide sufficient reasoning identifying the concrete expenses being disallowed and the specific legal grounds for disallowance. Generic references to expense categories without identifying particular items violate this duty. Additionally, under article 74 of the LGT, the burden of proof for constitutive facts supporting the tax obligation rests with the Tax Authority, not the taxpayer. If the TCA cannot demonstrate which specific expenses fail to meet deductibility requirements, the correction lacks legal basis. The assessment may be challenged through administrative appeal or arbitration, with courts frequently annulling assessments lacking proper specification.
How does the CAAD arbitral tribunal review partial deferrals of tax complaints (reclamação graciosa) regarding IRC?
CAAD arbitral tribunals review partial deferral decisions from administrative appeals (reclamações graciosas) by examining both the original assessment acts and the reasoning provided in the deferral decision. The tribunal has full jurisdiction to review questions of fact and law, assessing whether the Tax Authority properly applied IRC deductibility rules and complied with procedural requirements. When reviewing partial deferrals, the tribunal evaluates: (1) whether the original assessment was properly reasoned; (2) whether the deferral decision adequately addressed the taxpayer's arguments; (3) whether the factual findings are supported by evidence; and (4) whether the legal interpretation of deductibility rules is correct. The tribunal can annul the assessment for substantive errors (incorrect application of tax law) or formal defects (lack of reasoning), and is not bound by the administrative decision's conclusions.