Summary
Full Decision
ARBITRAL DECISION
1. REPORT
1.1. A… and B…, married to each other, taxpayer no. … and …, respectively, resident in Rua …, …, … – Porto, hereinafter referred to as Requesters, filed on 09/03/2017 a petition for constituting a tribunal and for an arbitral decision, in which they request the annulment of the decision of partial dismissal of the administrative appeal regarding the assessment of Personal Income Tax (IRS) for the year 2014 (2016…) and the respective compensatory interest.
1.2. The Honourable President of the Deontological Council of the Centre for Administrative Arbitration (CAAD) designated on 05/05/2017 Francisco Nicolau Domingos as arbitrator.
1.3. On 22/05/2017 the arbitral tribunal was constituted.
1.4. In compliance with the provision of art. 17, nos. 1 and 2 of Decree-Law no. 10/2011, of 20 January (RJAT), the Respondent was notified on 22/05/2017 to, if it so wished, submit a reply, request the production of additional evidence, and remit the administrative file (PA).
1.5. On 27/06/2017 the Respondent submitted its reply, in which it defends the lack of merit of the claims formulated in the proceedings.
1.6. The tribunal on 30/06/2017, given the absence of evidence to be produced, the non-existence of matters of exception to be decided before the merits were addressed, and the unnecessary nature of inviting the parties to correct their procedural pleadings, decided to waive the holding of the meeting to which art. 18, no. 1 of RJAT refers, on the basis of the principle of autonomy of the arbitral tribunal in conducting the proceedings and in determining the rules to be observed in order to obtain, within a reasonable period, a decision on the merits of the claims formulated, cf. art. 16, lit. c) of RJAT, granted 8 days for the parties, if they so wished, to present final written submissions and set a deadline for issuing the arbitral decision.
1.7. The parties presented their final written submissions on 11/07/2017 and 12/07/2017, respectively, maintaining their initial positions.
2. POSITIONS OF THE PARTIES
The Requesters begin by alleging that, following an inspection action regarding IRS for 2014, an assessment was issued in the amount of € 62,516.22 (2016…) based on the following corrections to annex G – table 8:
Field
Value Declared
Value of correction to be made
Final Value
801
€ 37,146.29
€ 37,146.29
€ 0.00
802
€ 7,000.00
€ 7,000.00
€ 0.00
803
€ 8,000.00
€ 8,000.00
€ 0.00
804
€ 95,090.00
€ 95,090.00
€ 0.00
805
0.00
€ 54,335.09
€ 54,335.09
806
0.00
€ 24,571.75
€ 24,571.75
The assessment was administratively challenged through administrative appeal no. …2016…, which was partially granted in relation to the corrections of fields 802 and 803, so that the subject matter of the petition for arbitral decision consists of the illegality of the partial dismissal – assessment arising from the corrections described in fields 801, 804, 805 and 806.
i) Field 801
The Requesters argue that the field in question relates to losses from the sale of shares, given that on 17/12/2014 they sold 3 lots of shares in C… (340,658 shares) for the total amount of € 24,391.11, which had been acquired in February and July 2014 for the total amount of € 37,146.29.
In this regard, they state that the reasoning set forth in the decision of partial dismissal of the administrative appeal, to the effect that the internal codes of the operations indicated by the Requesters are dissimilar, cannot be valid.
To substantiate their claim, they present the following arguments: i) in chronological terms, no one can sell shares in C… on 17/12/2014 that they purchased on 19/12/2014; ii) the fact is that the Requesters had acquired two lots of 340,658 shares in C…, one in February/July 2014 and another in December 2014, and it is certain that art. 43, no. 6, lit. d) of the Personal Income Tax Code (CIRS) requires that the shares disposed of are those acquired longest ago; iii) the argument that there is no coincidence between the internal codes of the securities has no legal value whatsoever, given that it is merely an internal code and the tax effect regarding IRS cannot depend on the organizational behavior of third parties – the financial system and the tax authority; iv) if the subject matter of the proceedings does not include allegedly abusive conduct by the Requesters – "unloading" the loss and repurchasing the securities on the same day – then such conduct does not form part of it, and v) there will always be a loss; the Tax and Customs Authority (AT) establishes a final value of zero, so the entire sale price was a gain. But even according to this view of the AT, if the taxpayer had acquired the C… shares for € 24,459.24 and disposed of them for € 24,391.11, there would be a loss in the amount of € 68.13.
ii) Field 804
With regard to this correction, they argue that the operation was documented in the only way possible for them, that is, with the bank documents provided by C…, where the securities were associated with their bank account. The documents attached as numbers 6 and 7 allow an unequivocal connection to be established between the purchase and sale operations. Furthermore, C… declares that it complied with the obligation to send Forms 13 and 33 regarding the operation in question here.
But even if this were not the case, if C… had not complied with the obligation to send Form 13, the burden would not be on the taxpayers, that is, the AT would have to inquire of C… regarding the reasons for the omission.
iii) Field 805
Requestor A… admits that he did not declare three securities sales operations in 2014, the total amount of which is € 54,335.09.
It happens that during the inspection and administrative appeal, a bank document was presented proving the data for the correct and exact calculation of the gain, with acceptance of the acquisition cost of € 24,380.80 and expenses.
Secondly, he argues that the fact that there is no coincidence between the codes of securities is irrelevant from a legal point of view, given that these are merely internal codes and do not possess any legal value. The law, for the determination of gains or losses, only requires that securities be of identical nature, and the tax effect regarding IRS cannot depend on the organizational behavior of third parties.
The Requestor, despite not having this burden, demonstrated that the shares in question were acquired in the context of a public tender offer carried out in 2013, through which the securities issued by D… were exchanged for capital of the same institution (shares).
Finally, he argues that the judicial power should limit itself to annulling the assessment without effecting any corrective calculations, given that they constitute an operation barred to that power.
iv) Field 806
With regard to this field, Requestor B… admits that she did not declare two securities sales operations in 2014, the total amount of which is € 24,571.75.
It happens that during the inspection and administrative appeal, a bank document was presented proving the data for the correct and exact calculation of the gain.
The challenged tax act assesses two operations, but assigns acquisition costs of zero to the gains, that is, the sale value equals the gain value.
The Respondent argues that the impugned tax act should be maintained in the legal order.
Specifically, it defends itself as follows:
a) Field 801
With regard to the sale of 340,658 securities, security code …, for the total amount of € 24,391.11, there is no coincidence of security codes in relation to the purchase. That is, although there is coincidence of the total number of securities purchased and acquired (340,658), the lot of 211,750 and 7,908 securities evidences a different security code.
Thus, with regard to the sale of 340,658 securities with security code …, for the value of € 24,391.11, occurring in December 2014, this corresponds to the acquisition of the same number of securities (340,658), with the same security code, but in the amount of € 24,459.24 and not € 37,146.29.
With respect to the codes, it argues that they do not constitute merely bureaucratic or organizational conduct, but rather the documentary representation that permits the distinction and individualization of financial assets.
b) Field 804
With regard to the purchase operation in the amount of € 95,090.00, corresponding to the sale in the amount of € 99,400.00, the documents attached to the file only specify the acquisition value and the realization value of the operation in question, not permitting the connection to be established between both operations, either in terms of the number of securities or in terms of security code, which are not mentioned therein.
Therefore, it considers that, in light of art. 74, no. 1 of the General Tax Law (LGT), it was the responsibility of the Requesters to prove the connection between the purchase and sale operations with respect to the same number of securities and security code.
c) Fields 805 and 806
Regarding the purchase and sale operations occurring in October 2013 and March 2014, the information contained in the draft administrative decision regarding the operation in question was taken from the "Form 13 – Securities, Autonomous Warrants and Derivative Financial Instruments" contained in the AT's computer system, which constitutes a reporting obligation incumbent upon banking institutions to inform it about the financial movements of purchase and sale of securities. The information that financial institutions send to the AT must always coincide with that provided by the taxpayers, which does not occur in the present case.
On the other hand, from the announcement of the Public Tender Offer for Exchange of Securities that the Requesters attached to the file in the administrative appeal, it does not follow that the security code in question is the same, that is, that … corresponds to … .
Thus, this is the issue that the tribunal must decide:
i) Whether the partial dismissal of the administrative appeal and, consequently, of the IRS assessment, should be annulled due to errors in the factual and legal premises.
3. PRELIMINARY DETERMINATION
The proceedings do not suffer from any nullities, the arbitral tribunal is properly constituted, and has material competence to know and decide on the petition, and consequently the conditions are met for issuing the final decision.
4. FACTUAL MATTERS
4.1. Facts Deemed Proven
4.1.1. The Requesters acquired on 07/02/2014, 23/07/2014 and 24/07/2014 a total of 340,658 shares in the amounts of € 22,868.52, € 13,763.75 and € 514.02, respectively.
4.1.2. On 17/12/2014 they sold 340,658 shares in C…, for € 24,391.11.
4.1.3. On 17/12/2014 the Requesters purchased 340,658 shares in C… for € 24,459.24, having also paid € 127.19 as a brokerage commission and Stamp Duty.
4.1.4. Requestor A… acquired on 07/09/2006 100 bonds E… (Main Cap. Fund. 5.5%), with ISIN …, for € 95,090.00.
4.1.5. The acquisition cost was € 95,090.00 and the accrued interest (€ 1,039.73), commissions (€ 332.82) and Stamp Duty (€ 13.31) borne in the total amount of € 1,385.86.
4.1.6. On 09/04/2014, Requestor A… disposed of 100 bonds E… (Main Cap. Fund. 5.5%), with ISIN …, for € 99,400.00, having borne a commission in the amount of € 745.50, to which was added Stamp Duty in the amount of € 29.82.
4.1.7. The Requesters did not declare 3 securities sales operations regarding Requestor A… (€ 54,335.09) and 2 operations regarding Requestor B… (€ 24,571.75) in the IRS return for the year 2014.
4.1.8. The sales operations regarding Requestor A… are as follows: i) 07/03/2014 – 2,438,080 shares in D…, for the amount of € 28,769.34; ii) 12/02/2014 – 13 bonds of C… – TV09.05.2014, for the amount of € 12,922.00, and iii) 12/02/2014 – 1,250,000 – OT – 4.375% – June 2003/2014, for the amount of € 12,643.75.
4.1.9. The shares described in 4.1.8 were acquired under the following conditions: i) 15/10/2013 – 2,438,080 shares in D…, for the amount of € 24,380.80 with expenses of € 175.54; ii) 12/03/2012 – 13 bonds of C… – TV09.05.2014, for the amount of € 10,432.50 with expenses of € 33.23, and iii) 12/03/2012 – 1,250,000 – OT – 4.375% – June 2003/2014, for the amount of € 10,218.75 with expenses of € 32.53.
4.1.10. Requestor B… disposed of the following securities: i) 12/02/2014 – 12 bonds of C… – TV09.05.2014, for the amount of € 11,928.00, and ii) 12/02/2014 – 1,250,000 OT – 4.375% – June 2003/2014, for the amount of € 12,643.75.
4.1.11. The securities described in 4.1.10 were acquired under the following conditions: i) 12/03/2012 – 12 bonds of C… – TV09.05.2014, for the amount of € 9,630.00 with expenses of € 30.67, and ii) 12/03/2012 – 1,250,000 OT – 4.375% – June 2003/2014, for the amount of € 10,218.75 with expenses of € 32.53.
4.1.12. The services of the Respondent found in 2016 that there were omitted income in the IRS return for 2014 of the Requesters, and divergence D 09 – Capital Gains was opened.
4.1.13. The Requesters on 02/12/2016 were notified of the draft administrative decision, in which the Respondent proposed to make the following corrections to annex G of the IRS return for the year 2014:
Field
Value Declared
Value of correction to be made
Final Value
801
€ 37,146.29
€ 37,146.29
€ 0.00
802
€ 7,000.00
€ 7,000.00
€ 0.00
803
€ 8,000.00
€ 8,000.00
€ 0.00
804
€ 95,090.00
€ 95,090.00
€ 0.00
805
0.00
€ 54,335.09
€ 54,335.09
806
0.00
€ 24,571.75
€ 24,571.75
4.1.14. The Requesters exercised their right to be heard by means of a written submission presented on 19/12/2016.
4.1.15. The Requesters were notified of the additional IRS assessment (no. 2016 …) for 2014 in the total amount of € 62,516.22, with this amount including € 2,143.64 as compensatory interest.
4.1.16. The Requesters filed an administrative appeal against such act on 20/06/2016 in which they requested the annulment of the following corrections to annex G:
Field
Value Declared
Value of correction to be made
Final Value
801
€ 37,146.29
€ 37,146.29
€ 0.00
802
€ 7,000.00
€ 7,000.00
€ 0.00
803
€ 8,000.00
€ 8,000.00
€ 0.00
804
€ 95,090.00
€ 95,090.00
€ 0.00
805
0.00
€ 54,335.09
€ 54,335.09
806
0.00
€ 24,571.75
€ 24,571.75
4.1.17. The administrative appeal no. …2016… was partially dismissed, with only the corrections made to fields 802 and 803 being granted.
4.1.18. The petition for constitution of tribunal and arbitral decision was filed on 09/03/2017.
4.2. Facts Not Deemed Proven
There are no other facts of relevance for the arbitral decision that have not been deemed proven.
4.3. Basis for the Factual Matters Deemed Proven
The factual matters deemed proven have their basis in the documents used for each of the facts alleged.
5. MATTERS OF LAW
Capital gains are included in category G of IRS which, according to the teaching of XAVIER DE BASTO[1], constitute unexpected increases in the value of patrimonial assets. Strictly speaking, this category incorporates a list of heterogeneous realities as to nature and source, but which are unified as income subject to taxation.
The central issue in this proceedings consists of determining whether the corrections undertaken by the AT are illegal and, thus, determining whether there are capital gains subject to taxation.
For this purpose, it is necessary, first, to enumerate the general rules of taxation of capital gains in IRS applicable to the case sub judice, namely, articles 10, 43, 44, and 48, all of the CIRS, in the version in force in 2014.
Art. 10
1 - Capital gains consist of gains obtained which, not being considered business or professional income, capital income, or real property income, result from:
a) Onerous disposal of real rights over immovable property and allocation of any assets from the private patrimony to business or professional activity exercised in the individual's own name by its owner;
b) Onerous disposal of partnership interests, including their redemption and amortization with reduction of capital, and of other securities, the extinction or delivery of partnership interests from merged, split or acquired companies in the context of merger, split, or exchange operations of partnership interests, as well as the value assigned as a result of distribution pursuant to article 81 of the Corporate Income Tax Code; …
Art. 43
1 - The value of income qualified as capital gains is the corresponding balance determined between the gains and losses realized in the same year, determined in accordance with the following articles.
2 - The balance referred to in the preceding number, relating to disposals made by residents provided for in lit. a), c) and d) of no. 1 of article 10, positive or negative, is only considered at 50% of its value.
3 - The balance referred to in no. 1, relating to disposals provided for in lit. b) of no. 1 of article 10, relating to micro and small enterprises not listed on the regulated or unregulated markets of the stock exchange, when positive, is equally considered at 50% of its value.
4 - For purposes of the preceding number, micro and small enterprises are understood as entities defined, in accordance with the annex to Decree-Law no. 372/2007, of 6 November.
5 - For determining the positive or negative balance referred to in no. 1, relating to operations made by residents provided for in lit. b), e), f) and g) of no. 1 of article 10, losses determined are not relevant when the counterparty of the operation is subject in the country, territory or region of domicile to a clearly more favorable tax regime, contained in the list approved by ministerial decree of the Minister of Finance.
6 - For purposes of the preceding number, it is considered that:
a) The date of acquisition of securities whose ownership has been acquired by the taxpayer through incorporation of reserves or by substitution thereof, particularly by change of nominal value or modification of the corporate purpose of the issuing company, is the date of acquisition of the securities from which they originated;
b) The date of acquisition of shares resulting from the transformation of a limited liability company into a joint stock company is the date of acquisition of the quotas from which they originated;
c) The date of acquisition of shares of the offering company in a public tender offer launched pursuant to the Securities Code whose consideration consists of those shares given in exchange, is the date of acquisition of the shares of the companies targeted in the said public tender offer;
d) Where securities are of the same nature and confer identical rights, the disposed of are those acquired longest ago;
e) In exchanges of partnership interests under the conditions mentioned in no. 5 of article 73 and in no. 2 of article 77 of the Corporate Income Tax Code, the holding period corresponds to the sum of the periods during which the partnership interests given and received in exchange were held;
f) The regime of the preceding lit. is applicable, with the necessary adaptations, to the acquisition of partnership interests in cases of merger or split to which article 74 of the Corporate Income Tax Code applies.
Art. 44
1 – For the determination of gains subject to IRS, the following is considered as realization value:
a) in the case of exchange, the value assigned in the contract to the assets or rights received, or the market value, when the former does not exist or the latter is higher, increased or decreased, one or the other, by the amount of money to be received or paid;
b) in the case of expropriation, the value of the indemnity;
c) in the case of allocation of any assets from the private patrimony of the holder of category B income to business or professional activity, the market value on the date of allocation;
d) in the case of securities disposed of by the holder of the right of exercise of autonomous sale warrants, and for purposes of lit. b) of no. 1 of article 10, the market price at the moment of exercise;
e) regarding assets or rights referred to in lit. d) of no. 4 of article 24, when there is no price or value previously fixed, the market value on the date referred to;
f) in all other cases, the value of the respective consideration.
2 – In the cases of lit. a), b) and f) of the preceding number, regarding real rights over immovable property, the values at which the assets have been considered for purposes of liquidating municipal tax on onerous transfers of immovable property shall prevail, when higher, or those that should be, if such liquidation were owed.
3 – In the case of exchange for future assets, the values referred to in lit. a) of no. 1 relate to the date of execution of the contract.
4 – In the case provided for in lit. c), the value resulting from the correction referred to in no. 4 of article 29 shall prevail, if it exists.
Art. 48
In the case of lit. b) of no. 1 of article 10, the acquisition value, when this has been made against payment, is the following:
a) Where securities are listed on a stock exchange, the cost documented or, in its absence, that of the lowest quotation verified in the two years before the date of disposal, if another lower one is not declared;
b) Where quotas or other securities not listed on a stock exchange are involved, the documented cost or, in its absence, the respective nominal value;
c) Regarding assets or rights referred to in lit. a) of no. 4 of article 24, the amount that was considered as the value of the asset or right on the date referred to therein;
d) Regarding assets or rights referred to in lit. b) of no. 4 of article 24, the subscription price or the price of exercise of the right for the generality of the subscribers or holders of the right, or the market value.
e) Regarding assets or rights referred to in lit. e) of no. 4 of article 24, the market value on the date referred to;
f) Regarding securities acquired by the holder of the right of exercise of autonomous purchase warrants, the market price at the moment of exercise.
Thus, it is possible to say that capital gain is, as a general rule, the difference between the acquisition value and the realization value, with the law establishing the definitions of what constitute these values, which is understood in light of the heterogeneous realities that form part of category G of IRS.
Art. 10, no. 1, lit. b) of the CIRS subjects to taxation capital gains resulting from securities. But one may question: how is the gain subject to IRS determined? What acquisition and realization value should be considered?
Art. 10, no. 4, lit. a) of the CIRS answers the first question, providing that the gain subject to IRS is constituted by: "The difference between the realization value and the acquisition value (emphasis ours), net of the part qualified as capital income, where applicable, in the cases provided for in lit. a), b) and c) of no. 1".
Regarding the acquisition value of securities to be considered in the operation of determination of capital gains, it is the documented cost – art. 48, lit. a) and b) of the CIRS. With regard to realization value, the amount to be considered may be that of the consideration or the market price at the moment of exercise, in the case of securities disposed of by the holder of the right of exercise of autonomous sale warrants – art. 44, no. 1, lit. f) and d) of the CIRS.
It is also important to highlight the rule provided for in art. 43, no. 6, lit. d) of the CIRS, that is, the FIFO (first in, first out) rule that determines that the disposed of securities are those acquired longest ago, provided that they are of the same nature (shares, bonds, participation securities) and confer the same rights (for example as to the assignment of dividends on shares).
The legislator, aware that in this area there may be tax avoidance conduct and with the aim of promoting transparency in the capital markets, establishes in art. 125 of the CIRS the obligation of credit institutions to communicate to the AT the operations carried out. Or, stated differently, the declaration delivered will permit, not only control of possible omissions in the income declaration, but also the application of the FIFO rule itself.
But in the present proceedings, the Requesters do not challenge the subjection to taxation of capital gains, but rather the correct insertion of the acquisition or realization values in fields 801, 804, 805 and 806 of table 8 of the disputed IRS return, which amount, in their view, is not correct.
Thus, the following question must be formulated: to whom did the burden of proof fall in the present case?
The Requesters consider, first of all, that there is a divergence between the reality and the factual matters used as the premise for the IRS assessment, and they also disagree with the interpretation of the applicable legal norms.
As a general rule, it falls to the one who invokes a right to prove the constitutive facts of the alleged right; proof of facts preventing, modifying or extinguishing the alleged right falls to those against whom such invocation is made.
Thus, in tax procedure, the burden of proving constitutive facts of rights falls on whoever invokes them, that is, the tax administration or the taxpayer – art. 74, no. 1 of the LGT.
In this regard, art. 75, no. 2 of the LGT determines that when some of the scenarios described therein occur, there is a reversal of the burden of proof. These include declarations that reveal omissions.
Although articles 74 and 75 of the LGT relate to tax procedure, the application of the standards extends to judicial proceedings. In this line and by reference to judicial challenge, the procedural means by which the legislator became bound to develop the legal regime of tax arbitration – art. 124, no. 2 of Law no. 3-B/2010, of 28 April, the doctrine[2] argues that: "In no. 1 of this article the principle is established that doubts regarding the existence and quantification of the tax fact are valued in favor of the taxpayer, leading to the annulment of the challenged act.
This is the practical implementation of the elimination in the area of tax litigation of the presumption of legality of acts of the tax administration, replaced by a presumption of truthfulness of acts of the citizen-taxpayer, which was announced in point 1 of the preamble of the CPT.
This rule embodies an application in the process of judicial challenge of the general rule on the burden of proof in tax procedure stated in art. 74, no. 1 of the LGT, in which it is established that the burden of proof of the constitutive facts of the rights of the tax administration or of the taxpayers falls on whoever invokes them.
Although this rule is provided for in tax procedure, its content must be transposed to the judicial proceedings that follow, so that whoever had the burden of proving certain facts in tax procedure has the respective burden in the tax judicial proceedings.
In fact, the consideration of interests, based on rules of normality, which justifies the distribution of the burden of proof in tax procedure, is the same that should be made in judicial proceedings, so that the criterion for distribution should be the same, as required by the coherence of values and axiological principles imposed by the principle of unity of the legal system, which is the primary element of legal interpretation (art. 9, no. 1, of the C.C.).
(…)
Thus, by reason of the fact that the challenger in the judicial challenge proceedings appears procedurally in a position in which they are invoking defects in a tax act, the burden of proof of facts that they did not have to prove in tax procedure should not be imputed to them, namely the burden of proving that the constitutive facts of the rights of the tax administration do not occur, facts whose verification it was the responsibility of the latter to prove in tax procedure."
In summary, the presumption of legality of acts of the tax administration is replaced, in the area of tax litigation, by a presumption of legality of acts of the taxpayer. Secondly, the constitutive facts of rights fall on whoever invokes them, that is, the taxpayer or the tax administration.
In the present proceedings, the Respondent challenges in the correction to field 801 and 804 the acquisition values entered by the Requesters in their IRS return for 2014, so that it is on the Respondent that the burden of proof falls.
On the other hand, regarding the corrections to fields 805 and 806, the Requesters admit the omission of income in their IRS return for the year 2014, so that the burden falls on their legal sphere.
It is thus important to determine whether, regarding each of the corrections to the disputed IRS return, the Requesters/Respondent succeeded in meeting their burden.
Let us begin with field 801. The Respondent argues that the sale of 340,658 securities with security code …, for the amount of € 24,391.11, corresponds to the acquisition of the same number of securities, with the same security code, but in the amount of € 24,459.24 and not € 37,146.29. That is, there is no coincidence between codes in the purchase and sale operations that were entered by the Requesters in their income declaration (€ 37,146.29 and € 24,391.11).
Articles 10, 43, 44, and 48, all of the CIRS do not require that for the determination of gain or loss there be a correspondence between security codes; they require, rather, that the acquisition and realization values correspond to the same securities.
Now, the Requesters attached with the petition for arbitral decision document no. 4 issued by F… – "Gains and losses provided for in article 10 of the IRS Code" which permits establishing a connection between the securities disposed of (17/12/2014) and those acquired on 07/02/2014, 23/07/2014 and 24/07/2014 in what respects the number and nature. In fact, while one understands the legislator's concern with determining the obligation of communication to the AT of the registration of securities operations, with a view to combating tax evasion, on the other hand, upon consulting the instructions for Form 13 and 33, it is noted that in fields 10 and 7 it states: "Indicate the code of the security according to ISIN coding (International Securities Identification Number), or 999 999 999 999 for cases in which there is no ISIN code and it concerns securities issued by resident entities, or 000 000 000 000 for cases in which there is no ISIN code and it concerns securities issued by non-resident entities". Or, stated differently, the entry will not be mandatory when there is no such code available.
Furthermore, upon consulting Interbolsa Regulation no. 10/2003, as amended by Regulation no. 4/2010, in its art. 4, it is found that codes can be definitive, provisional or temporary. To this circumstance is added that, pursuant to art. 8 of the said regulation, the ISIN code can be altered: i) whenever the issuing entity decides to replace old securities with new securities, and ii) whenever the form of representation of securities is altered, by conversion of the same from book-entered to bearer form or vice versa, or a conversion of registered securities to bearer securities or vice versa occurs.
Thus, in light of the foregoing, the content of document 4 attached by the Requesters with the petition for arbitral decision permits the conclusion that the correction made with respect to this field is illegal.
Regarding the correction relating to field 804, the Respondent argues that the documents attached by the Requesters do not permit establishing an unequivocal connection between the purchase and sale operations, given that there is no specification of the number of securities or of the security code.
All the legal reasoning expended with respect to the previous correction is applicable here.
The AT's own services in assessing the administrative appeal state with respect to this correction that: "In fact, the connection can only be established if the purchase and sale operations correspond to the same number of securities, with the same security code. It being certain that, as already stated in the draft decision, since the 'Form 13' does not include the purchase operation given the age of the operation in question, it would always have been incumbent on the Appellant to attach the necessary proof in accordance with what is required by art. 74, no. 1 of the LGT, which it did not do, continuing not to do so in this instance". Or, stated differently, the date of acquisition of the securities in question does not permit access to the purchase operation and, consequently, to the associated security code.
It happens that, with the petition for arbitral decision the Requesters attached document no. 6, and it is certain that upon analyzing its content it is possible to demonstrate that the nature, quantity, and ISIN of the bonds disposed of on 09/04/2014 correspond to those acquired on 07/09/2006. Now if such is the case, here too the correction to the acquisition value is illegal.
Finally, regarding fields 805 and 806, it is the Requesters themselves who admit the omission of the sales operations in the IRS return for the year 2014.
With respect to field 805, they argue that the sales operations: i) 07/03/2014 – 2,438,080 shares in D… for the amount of € 28,769.34; ii) 12/02/2014 – 13 bonds of C… – TV09.05.2014 for the amount of € 12,922.00, and iii) 12/02/2014 – 1,250,000 – OT – 4.375% – June 2003/2014 for the amount of € 12,643.75 have correspondence in number and nature with those acquired under the following conditions: i) 15/10/2013 – 2,438,080 shares in D… for the amount of € 24,380.80 with expenses of € 175.54; ii) 12/03/2012 – 13 bonds of C… – TV09.05.2014 for the amount of € 10,432.50 with expenses of € 33.23, and iii) 12/03/2012 OT – 4.375% – June 2003/2014 for € 10,218.75 with expenses of € 32.53.
As for the sum of realization values (€ 54,335.09), those which were subject to correction, in light of the content of document attached as no. 2 with the petition for arbitral decision, there is no objection to be made to the said correction, the Requesters themselves admit its omission, so that it is legal and must be maintained in the legal order.
Regarding the acquisition values in question here – operation i) of the preceding paragraph, the Respondent argues in assessing the administrative appeal with respect to such operation that, despite the attachment to the file of the announcement of the Public Tender Offer for Exchange of Securities, it does not clearly follow that the security code in question in the operation is the same, that is, that … corresponds to … .
As already mentioned, one of the bases for the alteration of the ISIN code consists of the replacement of old securities with new securities, art. 8, no. 1 of Interbolsa Regulation no. 10/2003.
In the case sub judice there is a Public Tender Offer for Exchange of Securities, which, in light of the law, will justify the divergence.
But if any doubts existed, by consulting document attached with the petition for arbitral decision as no. 8, correspondence in number and nature is verified with respect to the operation in question regarding the securities in relation to the purchase and sale. Thus, the value of € 24,380.80 contributes to the acquisition value, and as such, its non-consideration is illegal.
Finally, in relation to field 806, the realization value, that which was subject to correction, in light of the content of document attached as no. 2 with the petition for arbitral decision, there is no objection to be made, the Requesters themselves admit its omission, so that such correction is legal and must be maintained in the legal order.
Regarding acquisition values of this field, nothing is stated in the assessment of the administrative appeal, nor does the document supporting the challenged assessment – attached as no. 2 to the petition for arbitral decision refer to anything other than the correction of the realization value from 0 to € 24,571.75. However, by consulting the document attached with the petition for arbitral decision as no. 8, correspondence in number and nature of the securities is verified as to the field in question. Thus, the value of € 24,380.80 contributes to the acquisition value, and thus, its non-consideration is illegal.
Given the maintenance of some of the corrections, the question arises of partial annulment of the assessment underlying the partial dismissal of the administrative appeal. To this effect the doctrine teaches[3]: "Pursuant to art. 100 of the LGT, in case of total or partial grant of an administrative appeal, judicial challenge or appeal in favor of the taxpayer, the tax administration is obligated to immediately and fully restore the legality of the act or situation which is the subject of the dispute. From this norm is inferred the possibility of partial annulment of tax acts. The Administrative Court has generally understood that assessment acts, by defining a sum, are naturally divisible, and legally so, because the law provides for the possibility of partial annulment of those acts, in the said art. 100, by providing for the possibility of partial procedural success (as previously, art. 145 of the CPT provided). However, such partial annulment can only be legally admissible when the basis for annulment applies only to a part of the act, that is, when there is only partial illegality. This will occur when an assessment act is based on a certain taxable matter and it is found that part of it was calculated illegally, because it should not have been considered. In these cases, there is no obstacle to the assessment act being annulled with respect to the part that corresponds to the taxable matter whose consideration was illegal, while the assessment remains in effect as to the part that corresponds to taxable matter not affected…".
Now, this is precisely what occurs in the case sub judice, in which the tribunal has found that the correction was illegal with respect to fields 801 and 804 of the IRS return for the year 2014 and, partially, as concerns the acquisition values of fields 805 and 806. Thus, the assessment act is annulled with respect to the part in which it considered the corrections declared illegal.
6. DECISION
On these terms and with the reasoning described above, it is decided to annul the act of partial dismissal of the administrative appeal, in the part in which it maintained the corrections to fields 801, 802 and the acquisition values to fields 805 and 806 of the IRS return for the year 2014, with all legal consequences.
7. VALUE OF THE PROCEEDINGS
The value of the proceedings is fixed at € 58,369.54, in accordance with art. 97-A of the Code of Tax Procedure and Process (CPPT), applicable by force of the provision of art. 29, no. 1, lit. a) of RJAT and of art. 3, no. 2 of the Costs Regulation in Tax Arbitration Proceedings (RCPAT).
8. COSTS
Costs in the amount of € 2,142, to be borne proportionally by the Requester (37.37%) and the Respondent (62.63%) according to the maintenance/annulment of the corrections to the IRS return for 2014 – document 2 attached by the Requesters, cf. art. 22, no. 4 of RJAT and Table I attached to the RCPAT.
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Lisbon, 12 September 2017
The Arbitrator,
(Francisco Nicolau Domingos)
[1] JOSÉ GUILHERME XAVIER DE BASTO, IRS: Real Incidence and Determination of Net Income, Coimbra Editora, 2007, p. 379 et seq.
[2] JORGE LOPES DE SOUSA, Tax Procedure and Process Code – Annotated and Commented, Volume II, 6th edition, Áreas Editora, 2011, p. 131 and 132.
[3] JORGE LOPES DE SOUSA, Tax Procedure and Process Code – Annotated and Commented, Volume II, 6th edition, Áreas Editora, 2011, p. 342.
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