Process: 155/2018-T

Date: October 31, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitral decision addresses whether per diem allowances (ajudas de custo) paid to workers seconded abroad are subject to IRS withholding tax in Portugal. The Tax Authority conducted an inspection for the 2012 financial year and issued additional assessments totaling €142,755.19, arguing that travel allowances constituted employment income under Article 2(1)(d) of the IRS Code since expenses were not actually incurred by workers. The taxpayer company challenged the assessment on multiple procedural and substantive grounds. Procedurally, the company alleged violation of the right to be heard, claiming the Tax Authority failed to properly analyze arguments presented during the inspection process and wrongfully rejected witness testimony during the administrative complaint procedure. The company also argued the decision lacked proper reasoning. Substantively, the taxpayer maintained the allowances were genuine expense reimbursements, not taxable income, as the company deducted accommodation costs from payslips and workers bore actual expenses abroad, particularly in situations where clients only provided cafeteria access but not meal costs. The Tax Authority defended its position, stating the right to be heard was respected, witness testimony is not admissible in administrative complaint proceedings under Article 69(e) of the LGT, and the inspection report contained sufficient reasoning. The case illustrates the critical distinction between taxable employment income and non-taxable expense reimbursements for cross-border workers, and highlights procedural rights in Portuguese tax inspection and administrative complaint procedures, particularly regarding evidence admissibility and the scope of the right to be heard.

Full Decision

ARBITRAL DECISION

The arbitrators Carlos Fernandes Cadilha (Chairman), Augusto Vieira and Rui Ferreira Rodrigues (Members), designated by the Ethics Council of CAAD to form the arbitral tribunal, constituted on 12 June 2018, hereby agree as follows:

I – Report

1. A..., S. A., NIPC..., with registered office at ..., ..., ..., ...-... ..., hereby requests the constitution of an arbitral tribunal, pursuant to the provisions of articles 2, no. 1, paragraph a), and 10 of Decree-Law no. 10/2011, of 20 January, to assess the legality of the tax acts of additional assessment of Personal Income Tax (IRS), by way of withholding at source, and of assessment of compensatory interest, in the total amount of € 142,755.19 €, as well as the act of dismissal of the administrative complaint filed against these assessment acts, and further requesting condemnation to the payment of indemnificatory interest.

The request is substantiated as follows.

Following an inspection action covering the financial year 2012, the Tax Administration determined arithmetic corrections in the context of IRS due to the omission of withholding at source on allowances for workers seconded abroad, having understood that allowances for expenses should be considered as income from dependent work, in application of the provisions of article 2, no. 1, paragraph d), of the IRS Code, as they relate to expenses that were not actually incurred by the workers.

The Applicant alleges that the inspection procedure is vitiated by nullity, by violation of the right to be heard, inasmuch as the response presented in the exercise of the right to be heard was placed at the end of the tax inspection report and this merely reproduces the draft decision without performing any critical analysis of the considerations formulated by the Applicant in the exercise of the right to be heard. And, in the same way, the administrative complaint procedure violates the right to be heard by not complying with the request for the production of witness evidence, which was necessary for the establishment of the relevant facts, with the Finance Office merely dismissing the application on the basis of generic considerations about the viability of producing evidence in the context of administrative challenge.

On the other hand, the dismissal of the request for examination of the witnesses cited in the administrative complaint without any explanation of the reasons justifying the dispensation of the investigative measure taints the decision handed down in the administrative complaint procedure with the defect of lack of reasoning.

The additional assessment and the act of dismissal of the administrative complaint are further vitiated by defect due to error in the factual assumptions, by imputing as income from work, for the purposes of the incidence of withholding at source, amounts received by workers as allowances for expenses.

The Applicant assumes responsibility for payment of the accommodation expenses of workers seconded abroad and proceeds to deduct the totality of these amounts from the payslip, so that it is the workers who bear this expense.

With regard to the work to be carried out in ..., in accordance with the contractual terms, the client assumed the accommodation expenses and only provided the use of the cafeteria so that workers could prepare their meals, not assuming responsibility for the cost of meals, and in this as in other situations the allowances for expenses paid to workers did not constitute income and were intended to compensate for expenses borne by them abroad.

The Tax Authority, in its response, maintains that the right to be heard of the interested party is taken into consideration by the services, and the placement of its analysis at the end of the inspection report, immediately before the final decision, is due only to reasons of systematization, in which case the meaning of the draft decision was maintained since no new facts were adduced that would justify a different solution.

There is also no violation of the right to be heard as a result of the failure to hear the witnesses cited in the administrative complaint, since it is for the investigating officer to decide which evidence should be considered as relevant to the assessment of the matter on a legal basis, moreover, as regards the administrative complaint procedure, the law provides that only documentary evidence is admissible (article 69, paragraph e), of the LGT).

The inspection report and the decision to dismiss the administrative complaint also contain clear, sufficient and consistent grounds, allowing the interested party to have all the elements that permitted him to understand the scope of the tax acts, so that the invoked defect of lack of reasoning is not verified.

As regards the alleged error in the factual assumptions, the Respondent, in its response, refers to the grounds contained in the tax inspection report, concluding that the application is unfounded.

2. In the course of the proceedings, the meeting referred to in article 18 of the RJAT was held in which the witness evidence indicated by the Applicant was produced.

In arguments filed in succession, the parties pronounced themselves on the probative results arising from the elements of the proceedings and the witness evidence produced and, moreover, maintained their previous positions.

3. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax Authority in accordance with applicable regulations.

Pursuant to the provisions of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council designated as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the appointment within the applicable time period.

The parties were duly and timely notified of this designation and did not express any intention to refuse it, in accordance with the combined provisions of article 11, no. 1, paragraphs a) and b), of the RJAT and articles 6 and 7 of the Code of Ethics.

Accordingly, in compliance with the provisions of paragraph c) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 12 June 2018.

The arbitral tribunal was regularly constituted and is materially competent, in light of the provisions of articles 2, no. 1, paragraph a), and 30, no. 1, of Decree-Law no. 10/2011, of 20 January.

The parties have judicial personality and capacity, are legitimate and are represented (articles 4 and 10, no. 2, of the same statute and 1 of Ordinance no. 112-A/2011, of 22 March).

The proceedings do not suffer from nullities, this application was timely presented and no exceptions were raised.

It is incumbent to assess and decide.

II - Reasoning

Factual Matters

3. The facts relevant to the decision of the case that may be considered as established are as follows:

- The Applicant was the subject of an inspection action covering the year 2012, pursuant to Service Order no. OI2016... which resulted in arithmetic corrections in respect of withholding at source on IRS;

- The Applicant was notified of the act of assessment of withholding at source of IRS for the financial year 2012, under no. 2017..., in the amount of € 120,012.00, and of assessment of compensatory interest, in the amount of € 22,743.19, corresponding to the total amount € 142,755.19;

- On 10 November 2017 it filed an administrative complaint against the assessment act;

- On 30 November 2017, it was notified of the draft decision to dismiss the administrative complaint;

- On 15 December 2017, the Applicant exercised the right to prior hearing in relation to the draft decision;

- The administrative complaint was dismissed by order of 21 December 2017, of the division chief by delegation of the Finance Director of ...;

- The Applicant made payment of the amount corresponding to the additional assessment of withholding at source on IRS.

- The Applicant executed several projects for the installation of refractory and anti-acid materials in works located in Portugal and in foreign countries;

- Pursuant to the employment contracts concluded, the workers hired agreed to provide services in Portugal or abroad and to be transferred temporarily or permanently depending on the needs of the Applicant's business activity;

- The allocation of allowances for expenses is also provided whenever the worker is seconded abroad or outside his area of residence;

- The Applicant arranged for accommodation for seconded workers and assumed responsibility for the corresponding expense;

- The workers were accommodated in prefabricated buildings, in camping parks and in budget hotel chains, and in some cases in rooms with multiple beds;

- Regarding the work ... ... –... (...), it was contractually defined that the client B... provided accommodation on the work site and access to kitchens during the work phase;

- The work referred to in the preceding paragraph M) was located in a desertified area;

- In the workers' payslips, the amount of €10 was debited for each day of allowance paid, intended to reflect the expenses borne by the Applicant with accommodation;

- The amount of €10 corresponded to the average value of accommodation expenses calculated on the basis of expenses incurred in the previous year at the various locations where works were being executed;

- In all situations, food expenses were borne by the workers;

- Allowances for expenses were processed for each working day and had a variable value depending on the cost of living in the region where the work was located;

- Allowances for expenses were not paid during holidays nor included in the Christmas subsidy;

- The tax inspection report considered as a daily limit in the allocation of allowances for expenses the value of € 119.13, corresponding to the highest value fixed for civil servants, pursuant to Ordinance no. 1553-D/2008, of 31 December, as amended by Decree-Law no. 137/2010, of 28 December;

- The monthly calculation of withholding at source on income from work is that contained in the table in section III 2.5 of the tax inspection report, which is reproduced here;

- The draft decision to dismiss the administrative complaint, the response of the Applicant in the exercise of the prior right to be heard and the decision to dismiss the administrative complaint contained, respectively, in documents nos. 3, 4 and 5 attached with the application, are reproduced here;

- On 27 March 2018, the Applicant delivered the present request for arbitral pronouncement to CAAD.

The Tribunal formed its conviction as to the proven facts on the basis of the documents attached to the petition and the administrative proceedings attached by the Tax Authority with its response.

Matters of Law

4. Order of Knowledge of Defects

The Applicant bases its request for contentious annulment on the defect of violation of the right to prior hearing, with respect to the inspection procedure and the administrative complaint, and on the defect of lack of reasoning, attributable to the decision handed down in the administrative challenge, as well as on the defect of error in the factual assumptions.

As provided in article 124 of the Code of Tax Procedure and Process, in the judgment to be handed down in the challenge proceedings, the court shall assess as a priority the defects leading to the declaration of non-existence or nullity of the challenged act and, afterwards, the challenged defects leading to its annulment (no. 1), with priority assessment being given, in the first group, to the defects whose substantiation determines, according to the prudent discretion of the judge, more stable or effective protection of the offended interests, and, in the second group, that indicated by the challenger, provided it establishes between them a relationship of subsidiarity and no other defects are raised by the Public Prosecutor (no. 2).

In the present case, no defects are raised that lead to the declaration of non-existence or nullity of the challenged act or others resulting from the exercise of public action, with only defects leading to the annulment of the administrative act being at issue. On the other hand, a relationship of subsidiarity is not established between the alleged defects, so that, in application of the general criterion for the order of knowledge of defects, one should begin by assessing the type of illegality that provides more stable or effective protection of the offended interests.

In this sense, in the comparison between defects of form, which do not preclude the renewal of the challenged act in execution of judgment, and error in the factual assumptions which calls into question the substantive aspects of the decision, it seems that this latter ground for challenge should be assessed as a priority.

Error in Factual Assumptions

5. The question that arises, at first, is whether the allowances for expenses processed by the Applicant, as an employer entity, in favor of its workers seconded abroad should be qualified as remuneration for the purposes of withholding at source under the IRS Code.

The Tax Administration, proceeding from the provisions of article 2, no. 2, paragraph d), of the IRS Code and the service instruction conveyed by office no. 34931, of 30 August 1995, of the General Directorate of Contributions and Taxes, considers that withholding at source is due in respect of the totality of allowances for expenses processed in favor of workers seconded in ..., by virtue of the respective food and accommodation expenses having been entirely borne by the client B..., and, in the remaining cases, withholding on the part that exceeds the limit of 70% of the daily allowance, subtracting from the value to be considered €10 daily that workers reimbursed to the company as accommodation charges.

The Administration also considers it established that food expenses were assumed by the workers, except as regards the work in ... where these expenses, like accommodation expenses, were the responsibility of the client.

The Applicant argues that, although it proceeds to pay the accommodation expenses of workers seconded abroad, it subsequently debits the totality of these amounts from the payslip, in the amount of €10 for each day of allowance paid, so that it was the workers who ultimately bore this expense. And, on the other hand, food expenses were the responsibility of the workers, with it being only in one case (1098 - ...) that the client undertook, in accordance with the contractual terms, to provide the use of the cafeteria so that workers could prepare their meals without assuming the costs of food.

The central question is, therefore, whether the allowances for expenses paid to seconded workers exceeded the limits fixed in law and whether they correspond to expenses that were not actually incurred by the workers.

6. According to the provisions of article 98, no. 1, of the IRS Code, in the version in force at the date, in cases where withholding of tax is due at the time of payment of dependent work income, the entities owing the income subject to withholding are obliged, at the time of payment of wages, to deduct the amounts corresponding to the application of the tax rates provided for this category of income.

Furthermore, in accordance with article 2 of the same statute, dependent work income includes, inter alia, all "remuneration paid or made available to its holder derived from work for another provided under an individual employment contract or another legally equivalent to it" and also "allowances for expenses and amounts received for the use of a personal motor vehicle in the service of the employer entity, to the extent that both exceed the legal limits" (article 2, no. 1, paragraphs a) and d)).

The reference to the legal limits contained in paragraph d) of no. 1 of this latter provision should be understood as intending to refer to Decree-Law no. 192/95, of 28 July, which regulates the payment of allowances for expenses for secondments in public service abroad and, specifically, to the provisions of article 2, no. 1, of that statute, which stipulates the following:

"Personnel who are seconded abroad and within a foreign country for reasons of public service are entitled, as an alternative and according to their choice, to one of the following benefits:

a) Payment of the daily allowance for expenses, on all days of the secondment, in accordance with the table in force;

b) Accommodation in a three-star hotel or equivalent establishment, plus the amount corresponding to 70% of the daily allowance for expenses, on all days of the secondment, in accordance with the table in force."

According to the facts considered as established, the standard employment contracts for workers seconded abroad provided for the payment of allowances for expenses in accordance with the tables practiced by the company.

As a general rule, accommodation was provided by the Applicant, which directly assumed the corresponding expense and debited in the monthly salary slip the amount of €10 for each day of allowance assigned, which was intended to compensate for the expense borne by the company.

Food expenses were always the responsibility of the workers.

With regard to the work ... ... -..., it is proven that the client assumed, as a result of the contract, the accommodation expenses and provided the use of the cafeteria so that workers could prepare their meals, not assuming responsibility for the cost of food.

7. To conclude on the obligation of withholding at source, the Tax Administration proceeds from two different sets of considerations: regarding the work executed in ..., the allowances for expenses relate to expenses that were not actually incurred by the workers; as regards the remaining works, the allowances for expenses exceed the amount corresponding to 70% of the daily allowance for expenses as this is the legal limit provided for cases where accommodation is provided by the employer entity.

With regard to the first question, the argument invoked by the Tax Administration is not sufficiently supported by the facts considered as established. In fact, what is demonstrated is that the client undertook to provide accommodation to the workers and to provide the use of kitchens for the preparation of meals. And this will have been due to the logistical difficulties that could arise from the non-existence of commercial places for overnight accommodation or food supply.

In any case, the taxable person – as is also proven – did not fail to pass on to the worker's assets the expense with accommodation through the debit, on the payroll, of €10 for each day of allowance. And workers did not fail to assume own expenses with food, since the client B... did not supply food nor paid for the acquisition of food products and only provided the places where meals could be prepared.

With regard to the application of the 70% limit on allowances for expenses, the Tax Administration also bases itself on facts of which there is insufficient evidence.

As has been seen, the aforementioned provision of article 2, no. 1, of Decree-Law no. 192/95, of 28 July, just transcribed, provides for two forms of payment of allowances for expenses: that corresponding to the total amount established for each day of secondment; 70% of the daily allowance for expenses when the worker has opted for accommodation in a three-star establishment or equivalent, the limitation here established being based on the assumption that the cost of accommodation is the responsibility of the employer entity.

What is proven, in the case at hand, is that the workers of the Applicant were never accommodated in three-star hotels or equivalent, but in prefabricated buildings, camping parks or budget hotel chains, and in some cases in rooms providing accommodation for several people. And, furthermore, they proceeded to debit from the payslip the amount of €10 for each day of allowance, which corresponded to the average value of accommodation expenses borne by the company.

Given this factuality, there was no reason to frame the situation within paragraph b) of no. 1 of article 2 of Decree-Law no. 192/95, since not only is the assumption on which the operation of this rule depends not verified (accommodation in a three-star hotel or equivalent), but also there is no actual provision of accommodation in kind when the worker is obliged to reimburse the expenses incurred by the employer.

Aware of this difficulty, the Tax Authority determined the subtraction of the €10 debit from the daily value of the allowance for the purposes of determining the legal limit of 70%, as well as from the daily value of the allowance in the case in which it considers it subject in full to withholding at source.

But the matter cannot be solved in this way.

The 70% limit would only be applicable under the conditions defined in the aforementioned provision of Decree-Law no. 192/95, which, in this case, are not met. And the reimbursement that is effected by the workers is not relevant to calculate the daily value of the allowance to be considered, but is, in itself, a factor excluding withholding at source in that it shows that accommodation was not provided free of charge to the worker.

By the same reasoning, this reimbursement is relevant to demonstrate that workers did not fail to bear the expenses with the accommodation that was provided to them in the work carried out in ..., so that there is not even a need to characterize the allowance for expenses, in that case, as income from work for the purposes of withholding at source.

On the other hand, in the assessment of the case, the rules of material evidence resulting from articles 74 and 75 of the LGT cannot be disregarded. It is incumbent on the Tax Administration to prove the facts constituting the existence of the excess of the limits applicable to allowances for expenses (article 74, no. 1). In addition, the data and determinations entered in the accounting of the taxable person are presumed to be true and only when the accounting contains omissions, errors, inaccuracies or founded indications that do not reflect or prevent knowledge of the taxable matter does this presumption cease, implying that the burden of proof of the facts contained in the books falls on the taxable person (article 75, no. 1, and no. 2, paragraph a)).

Since the existence of any of the situations justifying the cessation of the presumption has not been invoked and the Tax Administration's basis is solely the different legal classification of the items recorded in the accounting as allowances for expenses, the accounting entries contained in the books must be taken as true, and it is incumbent on the Tax Administration to prove that the workers did not bear the costs with accommodation and food or benefited from accommodation provided by the employer entity under the conditions that justify the limitation of the allowance for expenses to 70%.

Since this proof has not been effected and probative results have been reached that point in the opposite direction, the illegality of the tax assessment act must be considered verified.

Requests Whose Knowledge Is Prejudiced

8. Given the legal solution of the case, the knowledge of the defects of pretermission of the right to prior hearing and lack of reasoning is prejudiced, which, even if judged to be substantiated, would not prevent the renewal of the challenged acts.

Indemnificatory Interest

9. The Applicant further requests condemnation of the Tax Authority to pay indemnificatory interest, at the legal rate, calculated on the tax, until full reimbursement of the amount due.

In accordance with the provisions of paragraph b) of article 24 of the RJAT, the arbitral decision on the merits of the claim from which no appeal or challenge is available binds the Tax Administration, in the exact terms of the substantiation of the arbitral decision in favor of the taxable person, obliging it to "restore the situation that would have existed if the tax act subject to the arbitral decision had not been practiced, adopting the acts and operations necessary for that purpose". Which is in line with the provisions of article 100 of the LGT, applicable by virtue of the provisions of paragraph a) of no. 1 of article 29 of the RJAT.

Furthermore, according to no. 5 of article 24 of the RJAT, "interest is due, regardless of its nature, in accordance with the terms provided for in the General Tax Law and in the Code of Tax Procedure and Process", which refers to the provisions of articles 43, no. 1, and 61, no. 5, of each of these statutes, entailing the payment of indemnificatory interest from the date of payment of the wrongfully paid tax until the date of processing of the corresponding credit note.

There is therefore due, following the declaration of illegality of the withholding at source assessment act, the payment of indemnificatory interest, in accordance with the aforementioned provisions of articles 43, no. 1, of the LGT and 61, no. 5, of the CPPT, calculated on the amount that the Applicant paid wrongfully, at the legal rate of interest (articles 35, no. 10, and 43, no. 4, of the LGT).

III – Decision

Terms in Which It Is Decided

- To judge the application for arbitral pronouncement well-founded and to annul the act of assessment of withholding at source of IRS for the financial year 2012, under no. 2017..., in the amount of € 120,012.00, and of assessment of compensatory interest, in the amount of € 22,743.19;

- Accordingly, to judge the application for arbitral pronouncement well-founded and to annul the act of dismissal of the administrative complaint filed against the tax assessment act;

- To condemn the Tax Authority to the payment of indemnificatory interest from the date of payment of the wrongfully paid tax until the date of processing of the corresponding credit note.

Value of the Claim

The Applicant indicated as the value of the claim the amount of € 145,425.19, which was not contested by the Respondent and corresponds to the value of the assessment that it sought to oppose, so that the value of the claim is fixed at that amount.

Costs

Pursuant to articles 12, no. 2, and 24, no. 4, of the RJAT, and 3, no. 2, of the Costs Regulation in Tax Arbitration Proceedings and Table I attached to that Regulation, the amount of costs is fixed at € 3,060.00, to be borne by the Respondent.

Notify.

Lisbon, 31 October 2018

The Chairman of the Arbitral Tribunal,

Carlos Fernandes Cadilha

The Arbitrator Member,

Augusto Vieira

The Arbitrator Member,

Rui Rodrigues

Frequently Asked Questions

Automatically Created

Are per diem allowances (ajudas de custo) paid to workers abroad subject to IRS withholding tax in Portugal?
Per diem allowances paid to workers abroad may be subject to IRS withholding tax if the Tax Authority determines they constitute employment income rather than genuine expense reimbursements. Under Article 2(1)(d) of the IRS Code, amounts paid as allowances can be classified as taxable income if the expenses were not actually incurred by the workers. The key distinction is whether the payments compensate real expenses borne by employees or represent additional remuneration disguised as allowances.
What happens if the tax authority considers per diem allowances as employment income under Article 2(1)(d) of the IRS Code?
When the Tax Authority considers per diem allowances as employment income under Article 2(1)(d) of the IRS Code, the employer becomes liable for withholding tax that should have been deducted from these payments. This results in additional IRS assessments against the employer for the omitted withholding amounts, plus compensatory interest (juros compensatórios) calculated from the date the tax should have been withheld. The employer must pay these amounts and may face difficulties recovering them from employees who already received the full allowance payments.
Can a taxpayer request witness testimony during a tax administrative complaint (reclamação graciosa) procedure?
Portuguese tax law generally does not permit witness testimony during administrative complaint (reclamação graciosa) procedures. Article 69(e) of the LGT (Lei Geral Tributária) restricts evidence in administrative complaints primarily to documentary proof. The Tax Authority has discretion to determine which evidence is relevant for assessing complaints on legal grounds. Rejection of witness testimony requests during this phase does not constitute a violation of procedural rights, as the administrative complaint is essentially a document-based review procedure rather than a full evidentiary hearing.
Does failure to properly address a taxpayer's right of hearing (direito de audição) invalidate a tax inspection procedure?
Failure to properly address a taxpayer's right of hearing (direito de audição prévia) can invalidate a tax inspection procedure if the violation is substantial. However, mere placement of the taxpayer's response at the end of the inspection report does not necessarily constitute a violation if the arguments were actually considered. The right to be heard requires that the Tax Authority genuinely analyze the taxpayer's arguments and provide reasoned responses. A decision that simply reproduces the draft without addressing substantive points raised by the taxpayer may be challenged as violating this fundamental procedural right under Portuguese tax law.
What are the grounds for challenging additional IRS assessments on withholding tax related to employee travel allowances?
Taxpayers can challenge additional IRS withholding tax assessments on several grounds: (1) Procedural defects, including violation of the right to be heard during inspection or administrative complaint procedures, and insufficient reasoning in tax decisions; (2) Error in factual assumptions (erro sobre os pressupostos de facto), arguing that payments classified as taxable income were actually non-taxable expense reimbursements; (3) Demonstrating that workers actually incurred the expenses for which allowances were paid, through evidence such as contracts showing expense allocation, payslip deductions, and testimony regarding actual expense patterns. Success requires proving the allowances compensated real expenses rather than constituting disguised remuneration subject to withholding tax.