Process: 141/2017-T

Date: July 28, 2017

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 141/2017-T) addresses whether painting and glass installation services under CAE code 43340 qualify for the 0.10 or 0.75 coefficient under the IRS simplified taxation regime for 2014. The taxpayer declared €8,650 in field 443 of Annex B (Category B income not included in previous fields), expecting the 0.10 coefficient under Article 31(2)(e) of the IRS Code. The Tax Authority reclassified this income to field 440 (professional activities in the CAE), applying the 0.75 coefficient under Article 31(2)(b), resulting in an additional assessment of €174.82. The taxpayer argued his painting activity was not listed in the Article 151 table of professional activities, constituting a qualification and quantification error. The Tax Authority countered that the activity, being a service provision under Article 3(1)(b) of the IRS Code and registered in the CAE, correctly belongs in field 440 with the 0.75 coefficient. The case illustrates the critical distinction between commercial/industrial activities (0.10 coefficient) and professional service activities (0.75 coefficient) in the simplified regime, and demonstrates how CAE classification and the Article 151 table interact to determine applicable coefficients for tax purposes.

Full Decision

ARBITRATION AWARD

I. REPORT

On 24 February 2017, the taxpayers A..., with TIN... and his wife, B..., with TIN..., with tax domicile at Rua..., no.... –..., ...-... – Vila Verde (hereinafter referred to as Claimants or, individually, as Claimant) filed, pursuant to the combined provisions of articles 2, no. 1, paragraph a) 5, no. 2, paragraph a), 6, no. 1 and 10, no. 1, paragraph a), all of the Legal Framework for Tax Arbitration (RJAT), approved by Decree-Law no. 10/2011 of 20 January and article 102, no. 1, paragraph b), of the Code of Tax Procedure and Process (CPPT), a request for the constitution of an Arbitral Tribunal, whereby the Tax and Customs Authority (hereinafter AT or Respondent) is the respondent, with a view to the declaration of illegality and consequent annulment of the Personal Income Tax (IRS) assessment for the year 2014 no. 2015..., in the amount of € 174.82 (one hundred and seventy-four euros and eighty-two cents), upheld by the decision dismissing the administrative appeal no. ...2016....

The Claimants further request the condemnation of the Respondent to refund the amount unduly paid, plus compensatory interest.

Summary of the Parties' Positions

a. Of the Claimants:

The Claimants support the request for annulment of the 2014 IRS assessment on the following grounds:

1. The Claimant is registered for the activity with CAE code 43340 – painting and fitting of glass, within the framework of the Simplified Tax Regime, although he only carries out that first activity;

2. In annex B of the IRS return for income in the year 2014, the Claimant marked, in table 3A – field 11, the CAE Code 43340 and, in table 4A – field 443 (Category B income not included in previous fields), income in the amount of € 8,650.00;

3. Although they justified the divergence communicated to them by the AT, they were subsequently notified of the intention to correct annex B, by inclusion of income in table 4A – field 440 (Income from professional activities provided for in the Table of article 151 of the IRS Code), which subsequently occurred;

4. From said correction resulted the assessment contested, arising from the application of the coefficient of 0.75, provided for in article 31, no. 2, paragraph b) of the IRS Code, to income in category B earned by the Claimant, instead of the coefficient of 0.10, contained in paragraph e) thereof;

5. As the activity carried out by the Claimant is not provided for in the Table attached to the IRS Code, there is a qualification error in the application of the 0.75 coefficient, as well as a quantification error in the taxable matter arising from that application;

6. For which reason the 2014 IRS assessment should be annulled and replaced by another which provides for the application of the 0.10 coefficient to income in category B earned by the Claimant;

7. Having the Claimants proceeded to payment of said assessment, they are entitled to refund of the amount paid, further requesting that they be paid compensatory interest, in accordance with article 43 of the General Tax Law, for error attributable to the services of the AT.

b. Of the Respondent:

Notified in accordance with and for the purposes provided for in article 17 of the RJAT, the AT filed a response and joined the administrative proceedings, alleging, in summary:

1. The Claimant, as of 31/12/2014, carried out the activity of "Painting and fitting of glass", with CAE code 43340, whose income he declared as category B income, in table 4A, field 443, of annex B, on the basis that the activity carried out did not fit within the previous fields;

2. Under the heading "Category B Income", article 3, no. 1, paragraph b), of the IRS Code, in the version in force at the date of the facts, established that:

"1 – Are considered business and professional income:

(...)

"b) Those earned in the exercise, on a self-employed basis, of any service provision activity, including those of a scientific, artistic or technical nature, whatever their nature, even if connected with activities mentioned in the preceding paragraph";

3. Table 4A of annex B is intended for declaring gross income arising from the exercise of professional, commercial and industrial activities or isolated acts of that nature, as defined in articles 3 and 4 of the IRS Code;

4. Field 443 is intended for the declaration of "category B income not included in previous fields", in particular, the provision of services which by virtue of article 4 of the IRS Code are categorizable under paragraph a) of no. 1 of article 3 of the IRS Code, provided that they are not provided for in paragraphs a) to d) and the first part of paragraph e) of no. 2 of article 31 of that diploma, that is, income "arising from the exercise of any commercial, industrial, agricultural, forestry or livestock activity", in accordance with paragraph a) of no. 1 of article 3 of the IRS Code;

5. This was not the situation of the Claimant who, in accordance with the Administrative Process, was carrying out, on 31/12/2014, a service provision activity provided for in the CAE;

6. Field 440, with the descriptor "Income from professional activities provided for in the Table of article 151 of the IRS Code and/or in the CAE", is intended for the indication of income earned in the exercise on a self-employed basis of any service provision activity which has a framework in paragraph b) of no. 1 of article 3 of the IRS Code or in accordance with the codes mentioned in the activities table approved by Ordinance 1011/2001 of 21/08;

7. In this respect, the instructions for completing the printed forms intended for compliance with the declaration obligation provided for in no. 1 of article 57 of the IRS Code, contained in Ordinance no. 276/2014 of 26 December, are clear;

8. With regard to the year 2014, the entry of income has repercussions on the choice of coefficient for determination of taxable income, in accordance with no. 2 of article 31 of the IRS Code, since the entry of income in field 440 corresponds to the taxation coefficient of 0.75, whereas for income entered in field 443, the coefficient to be applied is 0.10;

9. For the reasons set out, the corrective IRS assessment for the year 2014 remains entirely valid.

The Parties waived the holding of the meeting referred to in article 18 of the RJAT, the proceedings proceeding with successive written submissions, in which the positions taken in the initial procedural documents were reiterated.

II. PROCEDURAL SANATION

1. The sole arbitral tribunal is competent and was regularly constituted on 28 April 2017, in accordance with articles 2, no. 1, paragraph a), 5 and 6, all of the RJAT.

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

3. The proceedings do not suffer from vices that would invalidate them.

III. SUBSTANTIVE REASONING

III.1 FINDINGS OF FACT

The factual matter relevant to the understanding and decision of the case, following critical examination of the documentary evidence and the administrative process (PA) attached to the court file, is established as follows:

A – Proven Facts

1. The Claimant declared the start of activity with CAE Code 43340 – Painting and fitting of glass, on 13 March 2012, activity which he carried out in the year 2014 (Doc. 2 attached to the PI and PA);

2. On 25 May 2015, the Claimants filed, electronically, the IRS form 3 return for the year 2014, in which was included an annex B – (Simplified Regime), relating to income in category B earned by the Claimant in the exercise of the indicated activity (return no. ...-...-...) – Doc. 4 attached to the PI and PA);

3. In the said annex B were indicated, in table 1, fields 01 (Simplified Tax Regime) and 03 (Professional, Commercial and Industrial) and, in table 4A, field 443 (Category B Income not included in previous fields), the amount of € 8,650.00;

4. On 7 July 2015, the Claimant was notified by the AT of a divergence in the return filed, according to which "The type of business and professional income declared by TIN... in the respective field(s) of annex(es) B is not compatible with the activity codes declared or in which he was registered according to the Tax Authority's register" (Doc. 6 attached to the PI and PA);

5. The Claimant justified the divergence in the following terms: "By virtue of the provision in no. 1 of article 4 of the IRS Code, civil construction services are categorized in the concept of commercial and industrial activity, and are therefore in the simplified IRS tax regime taxed by the coefficient of 10% (paragraph e) of no. 2 of article 31 of the IRS Code). Thus, the values of income from civil construction services rendered should be declared in field 443 of the M3 IRS return..." (Doc. 6 attached to the PI and PA);

6. By official letter no.... of the Tax Service of..., dated 8 November 2015, the Claimant was notified to exercise the right to a hearing on the intention of the AT to proceed to correct Annex B, by transferring to field 440 of table 4A the value of income entered in field 443 of the same table (Doc. 7 attached to the PI and PA);

7. On 4 December 2015 was issued, in the name of the Claimants, the IRS assessment no. 2015..., relating to income for the year 2014, in which the tax to be paid was determined as € 174.82, with payment deadline of 18 January 2016 (Doc. 8 attached to the PI);

8. The Claimants paid the assessed tax on 16 December 2015 (Doc. 10 attached to the PI);

9. On 16 May 2016, the administrative appeal no. ...2016... was filed, in the scope of which the Claimant presented, at the request of the AT, invoices nos. 8, 9, 10 and 11, issued in the year 2014, from which it appears that the same come from "Labor services rendered" (invoices 8, 10 and 11) and "Painting" (invoice 9), attached to pages 27 et seq. of the administrative appeal, included in the PA;

10. The administrative appeal was dismissed by decision of the Finance Director of Braga, dated 24 November 2016, the decision being notified to the Claimant through official letter no. ... of the Tax Justice Division of the Finance Directorate of Braga, dated 28 November 2016, received by the addressee on 30 November 2016. (Doc. 1 attached to the PI and PA).

B – Unproven Facts

There are no facts relevant to the decision of the case that should be considered unproven.

III.2 LEGAL ANALYSIS

1. The issue to be decided

The issue which the arbitral tribunal must decide relates to the application of the coefficients provided for in no. 2 of article 31 of the IRS Code, in the version in force in 2014, to income in category B earned by the Claimant Husband in that year, in the exercise of activity with CAE Code 43340 – Painting and fitting of glass, on which depends the legality of the contested assessment.

The AT contends that the income earned by the taxpayer falls within the provision of article 3, no. 1, paragraph b), of the IRS Code, and that the coefficient of 0.75, provided for in article 31, no. 2, paragraph b), of the same Code, as amended by Law no. 83-C/2013 of 31 December, should be applied, and declared in field 440 of table 4A of annex B, as provided for in Ordinance no. 264/2014 of 26 December; for their part, the Claimants allege that the activity to be taxed falls within paragraph f) of no. 1 of article 4 of the IRS Code, and should be declared in field 443 of table 4A of annex B, with application of the coefficient of 0.10, provided for in article 31, no. 2, paragraph e) of the same Code, as it stood at the date of the facts.

It is thus a matter of proceeding to interpret the conflicting legal rules, taking into account that tax rules are interpreted in accordance with the general rules of legal hermeneutics contained in article 9 of the Civil Code, although with the specifications contained in nos. 2 to 4 of article 11 of the General Tax Law (LGT).

2. Applicable law

At the date of the facts, the following were the versions in force for the rules invoked by each of the Parties:

Article 3, no. 1, of the IRS Code:

"Article 3 – Category B Income

1 – Are considered business and professional income:

a) Those arising from the exercise of any commercial, industrial, agricultural, forestry or livestock activity;

b) Those earned in the exercise, on a self-employed basis, of any service provision activity, including those of a scientific, artistic or technical nature, whatever their nature, even if connected with activities mentioned in the preceding paragraph; (Version given by Law no. 32-B/2002 of 30 December)

c) Those arising from intellectual or industrial property or the provision of information respecting experience acquired in the industrial, commercial or scientific sector, when earned by their original holder.

(...)"

Article 4, no. 1, paragraph f), of the IRS Code:

"Article 4 – Commercial and industrial activities, agricultural, forestry and livestock (Version given by Law 30-G/2000 of 29 December)

1 – Are considered commercial and industrial activities, in particular, the following:

(...)

f) Civil construction;

(...)"

Article 31, no. 2, of the IRS Code:

"Article 31 – Simplified Regime

1 – (...)

2 – Until approval of the indicators mentioned in the preceding number, or in their absence, taxable income is obtained by adding to income from service provision performed by the partner to a company covered by the fiscal transparency regime, in accordance with paragraph b) of no. 1 of article 6 of the Corporate Income Tax Code, the amount resulting from application of the following coefficients:

a) 0.15 of sales of goods and products, as well as service provision within the scope of hotel and similar activities, catering and beverages;

b) 0.75 of income from professional activities listed in the table referred to in article 151;

c) 0.95 of income arising from contracts whose object is the assignment or temporary use of intellectual or industrial property or the provision of information respecting experience acquired in the industrial, commercial or scientific sector, of income from capital attributed to activities generating business and professional income, of the positive result of real estate income, of the positive balance of gains and losses and of remaining capital increments;

d) 0.30 of subsidies or subventions not intended for operations;

e) 0.10 of subsidies intended for operations and remaining income in category B not provided for in the preceding paragraphs. (Version given by Law no. 83-C/2013 of 31 December)

(...)"

Ordinance no. 249/2014 of 26 December – Instructions for completion – Annex B:

"Field 440 – Is intended for the indication of income earned in the exercise, on a self-employed basis, of any service provision activity which has a framework in paragraph b) of no. 1 of article 3 of the IRS Code, regardless of whether the activity carried out is classified in accordance with the Portuguese Classification of Economic Activities (CAE), of the National Institute of Statistics, or in accordance with the codes mentioned in the activities table approved by Ordinance no. 1011/2001 of 21 August, including the activity with code "1519 – Other service providers".

(...)

Field 443 – Is intended for the indication of the remaining income in category B, in particular, service provision that by virtue of article 4 of the IRS Code may be categorized under paragraph a) of no. 1 of article 3 of the said Code, provided that they are not provided for in paragraphs a) to d) and the first part of paragraph e) of no. 2 of article 31 of this Code and, thus, not included in the previous fields of this table"

It follows from the above evidence that the Claimant had been carrying out, since 2012, the economic activity with CAE Code 43340, which he also carried out in 2014.

This, in accordance with the Portuguese Classification of Economic Activities (CAE Rev. 3), approved in annex to Decree-Law no. 381/2007 of 14 November, falls under Section F – Construction; Division 43 – Specialized construction activities; Group 433 – Building finishing activities; Class 4334, Subclass 43340 – Painting and fitting of glass.

The construction activity is expressly provided for in article 4, no. 1, paragraph f) of the IRS Code, as constituting one of the "Commercial and industrial activities, agricultural, forestry and livestock".

As the Claimant comes under the simplified tax regime, the determination of taxable income in category B is ascertained by application to the gross income of that category of one of the coefficients provided for in the paragraphs of no. 2 of article 31 of the IRS Code, in the version in force for the year in question.

The AT takes the view that the coefficient applicable for determination of taxable income is 0.75, provided for in paragraph b) of no. 2 of article 31 of the IRS Code, on the grounds that the activity pursued by the latter consists of service provision, even if connected with an activity of a commercial, industrial or agricultural nature and, as such, categorizable under paragraph b) of no. 1 of article 3 of that Code, and also in accordance with the instructions for completion of annex B, contained in Ordinance no. 249/2014 of 26 December.

For their part, the Claimants maintain that the applicable coefficient is 10%, provided for in paragraph e) of no. 2 of article 31 of the IRS Code, since the activity carried out has a commercial, industrial or agricultural nature and does not fit within the list attached to article 151 of the IRS Code.

Now let us consider:

Invoices 8, 9, 10 and 11, issued by the Claimant Husband in 2014 and attached to the PA, evidence service provision (labor).

The IRS Code does not contain a definition of what constitutes service provision; only article 4, no. 1, of the VAT Code defines it, in a residual manner, by providing that "Considered as service provision are operations performed for consideration which do not constitute transmissions, intra-community acquisitions or imports of goods."

For its part, article 1154 of the Civil Code defines the service provision contract as being "that in which one party undertakes to provide to the other a certain result of its intellectual or manual work, with or without consideration".

And finally, article 230, no. 6, of the Commercial Code provides that commercial enterprises, whether individual or collective, are those which propose to "Build or construct houses for others with materials supplied by the entrepreneur".

Thus, in light of the rules cited and the tenor of the invoices issued by the Claimant, we believe that his activity amounts to service provision, even if connected with construction activity, to be categorized, therefore, under paragraph b) of article 3 of the IRS Code.

However, such conclusion does not follow that, without more, the coefficient of 0.75, referred to in paragraph b) of no. 2 of article 31 of the IRS Code, as amended by Law no. 83-C/2013 of 31 December, should be applied to the determination of his category B income for the year in question, as this only had application to "income from professional activities listed in the table referred to in article 151".

It will thus be the coefficient of 0.10, referred to in the final part of paragraph e) of no. 2 of article 31 of the IRS Code, in the version already cited, that is applicable to the situation under analysis, given that this was intended for the ascertainment of taxable income relating to "remaining income in category B not provided for in the preceding paragraphs", as is the case in these proceedings.

Nor do such circumstances stand in the way of the instructions for completion of annex B, approved by Ordinance no. 249/2014 of 26 December, as this cannot derogate from a rule which is hierarchically superior to it, such as Law no. 83-C/2013 of 31 December, which introduced the version of no. 2 of article 31 of the IRS Code, applicable to the situation of these proceedings.

Concluding from the quantification error in the taxable income underlying the contested assessment, the same cannot subsist, and should be replaced by another in which the taxable income in category B is ascertained on the basis of the coefficient contained in paragraph e) of no. 2 of article 31 of the IRS Code, in the version in force for the year 2014.

3. On the request for compensatory and default interest

In accordance with the provision in no. 1 of article 43 of the LGT, applicable subsidiary to the tax arbitration process, in accordance with article 29, no. 1, paragraph a), of the RJAT, "Compensatory interest is due when it is determined, in administrative appeal or judicial challenge, that there has been an error attributable to the services from which results payment of the tax debt in an amount greater than that legally due."

In the case at hand, as the contested assessment cannot be upheld, the Claimants' right to compensatory interest must be recognized, as it is subject to an error exclusively attributable to the Tax Administration.

4. Matters of Prejudiced Cognition

In the sentence, the judge must pronounce on all matters which he should appraise, refraining from pronouncing on matters of which he should not take cognizance (final segment of no. 1 of article 125 of the CPPT), and the matters on which the cognizance powers of the tribunal fall are, in accordance with no. 2 of article 608 of the CPC, applicable subsidiary to the tax arbitration process, by referral of article 29, no. 1, paragraph e) of the RJAT, "the matters which the parties have submitted to its appraisal, excepting those whose decision is prejudiced by the solution given to others (...)".

As they do not appear necessary for the judgment of the case, the cognizance of the remaining matters raised by the Parties is prejudiced, notably those related to the alleged discrimination of individual enterprises as against legal person enterprises, as well as the effectiveness of AT Circulars.

IV. DECISION

Based on the factual and legal grounds set out above, it is decided:

To hold that the request for declaration of illegality of the IRS assessment for the year 2014 issued in the name of the Claimants is well-founded, determining its annulment and replacement by another, in which income in category B is ascertained by application of the coefficient established by article 31, no. 2, paragraph e) of the IRS Code, in the version in force at the date of the tax event;

To condemn the AT to payment of compensatory interest, in accordance with article 43 of the LGT.

VALUE OF PROCEEDINGS: In harmony with the provision of article 306, nos. 1 and 2, of the CPC, 97-A, no. 1, paragraph a) of the CPPT and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the proceedings are assigned the value of € 174.82 (one hundred and seventy-four euros and eighty-two cents).

COSTS: Calculated in accordance with article 4 of the Regulation of Costs in Tax Arbitration Proceedings and Table I attached thereto, in the amount of € 306.00 (three hundred and six euros), charged to the Tax and Customs Authority.

Lisbon, 28 July 2017.

The Arbitrator,

/Mariana Vargas/

Text prepared on computer, in accordance with no. 5 of article 131 of the CPC, applicable by referral of paragraph e) of no. 1 of article 29 of Decree-Law 10/2011 of 20 January.

The wording of this decision is governed by the 1990 spelling agreement.

Frequently Asked Questions

Automatically Created

What coefficient applies under the simplified tax regime when a professional activity is not listed in the Article 151 table of the IRS Code?
Under the simplified tax regime, when a professional activity is not listed in the Article 151 table but is registered in the CAE (Classificação das Atividades Económicas) as a service provision activity under Article 3(1)(b) of the IRS Code, the 0.75 coefficient applies according to Article 31(2)(b). The Tax Authority's position is that field 440 of Annex B covers professional activities 'in the Article 151 table and/or in the CAE', meaning CAE registration alone can trigger the 0.75 coefficient even without inclusion in the Article 151 table. However, if the activity qualifies as commercial or industrial under Article 3(1)(a) and doesn't fit other categories, the 0.10 coefficient from Article 31(2)(e) would apply.
Can the Portuguese Tax Authority reclassify Category B income from field 443 to field 440 in the IRS Annex B declaration?
Yes, the Portuguese Tax Authority can reclassify Category B income from field 443 to field 440 in Annex B of the IRS declaration when it determines the activity fits the legal criteria for field 440. Field 440 is designated for 'income from professional activities provided for in the Article 151 table and/or in the CAE', while field 443 covers 'Category B income not included in previous fields'. The AT has correction powers under the CPPT (Code of Tax Procedure and Process) to ensure income is properly classified according to the activity's legal and economic nature. Such corrections can be challenged through administrative appeal or tax arbitration at CAAD, as demonstrated in this case where the taxpayer contested the reclassification that changed the applicable coefficient from 0.10 to 0.75.
What is the difference between the 0.75 and 0.10 coefficients under Article 31(2) of the Portuguese IRS Code?
The 0.75 and 0.10 coefficients under Article 31(2) of the Portuguese IRS Code represent dramatically different tax burdens in the simplified regime. The 0.75 coefficient under paragraph (b) applies to income from professional service activities (scientific, artistic, technical services), meaning 75% of gross income becomes taxable income. The 0.10 coefficient under paragraph (e) applies to commercial, industrial, agricultural, forestry, and livestock activities not covered by other paragraphs, meaning only 10% of gross income is taxable. For the €8,650 income in this case, the 0.75 coefficient yields €6,487.50 of taxable income, while the 0.10 coefficient produces only €865, creating a significant difference in final tax liability. This coefficient determines the portion of gross receipts presumed to be net profit for taxation purposes.
How can taxpayers challenge an IRS tax assessment through arbitration at CAAD under the simplified taxation regime?
Taxpayers can challenge an IRS assessment under the simplified taxation regime through tax arbitration at CAAD (Centro de Arbitragem Administrativa) by filing a request under the RJAT (Legal Framework for Tax Arbitration, Decree-Law 10/2011). The process requires: (1) prior filing of an administrative appeal (recurso hierárquico) that must be decided unfavorably or remain undecided; (2) submission of the arbitration request within 90 days after notification of the appeal decision or after the legal deadline for decision has expired; (3) payment of the initial arbitration fee; (4) specification of the contested act and legal grounds. This case demonstrates the procedure where taxpayers contested the €174.82 assessment resulting from coefficient application, having first exhausted administrative remedies. CAAD provides a faster alternative to judicial tax courts for resolving disputes under €10,000 or any amount if both parties agree.
Are painting and glass installation services (CAE 43340) considered professional activities subject to the 0.75 coefficient for IRS purposes?
According to the Tax Authority's position in this case, painting and glass installation services under CAE 43340 are considered professional service provision activities subject to the 0.75 coefficient. The AT argues that these services fall under Article 3(1)(b) of the IRS Code ('services of scientific, artistic or technical nature') and, being registered in the CAE, properly belong in field 440 of Annex B, triggering the 0.75 coefficient under Article 31(2)(b). However, the taxpayers contested this classification, arguing that painting is not listed in the Article 151 table of professional activities and should be treated as a commercial/industrial activity subject to the 0.10 coefficient. The dispute highlights the ambiguity in classifying manual service trades—whether they constitute 'professional activities' (0.75) or 'commercial/industrial activities' (0.10) depends on interpretation of the activity's nature and proper application of field descriptors in Annex B.