Process: 172/2014-T

Date: July 9, 2014

Tax Type: IRS

Source: Original CAAD Decision

Summary

In Process 172/2014-T, a taxpayer challenged an additional IRS assessment of €1,716.92 for fiscal year 2012 before the CAAD arbitral tribunal under Decree-Law 10/2011. The dispute arose from the Tax Authority's rejection of €9,593.66 in rental property expenses declared against category F income of €74,287.50. The taxpayer was notified to submit a replacement return within 30 days, with warnings of penalties under article 119º RGIT and assessment corrections under article 65º(4) of the IRS Code. The notification was signed by an Assistant to the Head of Tax Services based on delegated competence, accompanied by a ruling from the Head of Division dated October 31, 2013. The taxpayer alleged four procedural defects: (1) lack of competence due to improper delegation; (2) omission of prior hearing rights; (3) absence of mandatory statements required by article 36º(2) CPPT; and (4) error in factual assumptions. The arbitral tribunal, constituted on April 30, 2014, confirmed its material competence under articles 2º and 30º of DL 10/2011 to review IRS assessments. Examining the defects sequentially per article 124º CPPT, the tribunal focused first on the competence issue. The Tax Authority argued that delegation of competence derives directly from law (article 65º(5) IRS Code) and is therefore valid. However, the tribunal disagreed with this interpretation, suggesting that proper delegation formalities may not have been followed. The decision addresses fundamental questions of administrative competence, procedural rights, and the scope of arbitral jurisdiction in Portuguese tax disputes, establishing important precedents for challenging IRS assessments on both formal and substantive grounds through CAAD arbitration.

Full Decision

ARBITRAL AWARD

I – REPORT

A..., taxpayer no. …, with tax residence at Street …, of the municipality of Felgueiras, hereinafter designated as the Claimant, filed a request for constitution of an arbitral tribunal in tax matters and a request for arbitral judgment, under the provisions of articles 2º no. 1 a) and 10º no. 1 a), both of Decree-Law no. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, briefly designated as RJAT), petitioning the declaration of illegality of the additional assessment of Income Tax on Individuals relating to the fiscal year 2012, in the amount of € 1,716.92, with payment deadline of 19 February 2014.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 26-02-2014.

Pursuant to the provisions of section a) of no. 2 of article 6º and section b) of no. 1 of article 11º of the RJAT, as amended by article 228º of Law no. 66-B/2012, of 31 December, the Deontological Council appointed as arbitrator of the singular arbitral tribunal the undersigned, who communicated acceptance of the appointment within the applicable period.

On 11-04-2014 the parties were duly notified of this appointment and did not manifest willingness to challenge the arbitrator's appointment, pursuant to the combined provisions of article 11º no. 1 sections a) and b) of the RJAT and articles 6º and 7º of the Deontological Code.

Thus, in accordance with the provisions of section c) of no. 1 of article 11º of the RJAT, as amended by article 228º of Law no. 66-B/2012, of 31 December, the singular arbitral tribunal was constituted on 30-04-2014.

The Tax and Customs Authority replied, arguing that the request should be judged as unfounded.

Given that, in this case, none of the purposes legally entrusted to it are present, the parties dispensed with the holding of the meeting provided for in article 18º of the RJAT, which was accordingly waived.

The parties presented legal arguments, maintaining their respective positions.

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

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

The proceeding is not affected by nullities and no exceptions were raised.

Thus, there is no obstacle to the examination of the merits of the case.

Having considered all matters, it is necessary to deliver judgment.

II. AWARD

A. FACTUAL MATTERS

A.1. Facts Established as Proven

  1. The Claimant, in due course, submitted his income tax return Form 3-IRS for the year 2012.

  2. The said return included Annex F, in which he declared having obtained in that year category F income in the amount of €74,287.50, and having borne as expenses and charges for conservation or repair of the real property that produced the rental income the sum of €9,593.66.

  3. The Claimant was notified automatically by the system, within the scope of the analysis of the Form 3 IRS return – 2012, with analysis code IRS – D64 (category F expenses), to substantiate the amounts of expenses for rented properties.

  4. From the analysis of the elements presented by the Claimant, the Tax Authority services considered that they raised doubts regarding the location of application of the expenses borne.

  5. Consequently, by means of official letter no. ... of 2013-11-13, the Claimant was notified to proceed, within the period of 30 days, to the appropriate correction of the declared values, by submitting a replacement return.

  6. The said notification is signed by the Assistant to the Head of the Tax Authority Services of Felgueiras, on the basis of delegation of competence from that officer.

  7. He was further warned that the failure to submit the replacement return was punishable under the terms of article 119º of the General Regime of Tax Violations (RGIT).

  8. And that it would entail the alteration of the declared elements for the purpose of tax assessment, under the terms of no. 4 of article 65º of the IRS Code, and the initiation of the appropriate Notice.

  9. The aforementioned official letter was accompanied by a ruling of the Head of the Division of Assessment of Taxes on Income and Expenditure of the Finance Directorate of Porto, of 2013-10-31, with the content "Agreed. Send our opinion to the Tax Authority."

  10. In the said ruling, the reasons that imposed the respective corrections were pointed out, by means of submission of a replacement return.

  11. At no point in the notification is it stated that what was sent to it is a draft decision.

  12. In the said notification no period was set for the Claimant to exercise the right of hearing.

  13. The Claimant did not submit any replacement return.

  14. Without any further action by the services, on 2014-01-04 a notice of assessment was issued in the amount of €1,716.92, which the Claimant paid on 2014-01-21.

A.2. Facts Established as Not Proven

With relevance to the decision, there are no facts that should be considered as not proven.

A.3. Substantiation of the Proven and Not Proven Factual Matters

With regard to factual matters, the Tribunal does not need to pronounce itself on everything alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to distinguish between proven and not proven matters (cf. article 123º, no. 2, of the CPPT and article 607º, no. 3 of the CPC, applicable ex vi article 29º, no. 1, sections a) and e), of the RJAT).

In this manner, the relevant facts for the judgment of the case are chosen and determined in function of their legal relevance, which is established in consideration of the various plausible solutions to the legal question(s) (cf. former article 511º, no. 1, of the CPC, corresponding to the current article 596º, applicable ex vi article 29º, no. 1, section e), of the RJAT).

Thus, taking into account the positions assumed by the parties, the documentary evidence and the administrative file attached to the record, the above-listed facts were considered proven, with relevance to the decision, being moreover consensually recognized and accepted by the parties.

B. LAW

The Claimant attributes to the contested tax act, in summary, the following defects:

  • Lack of competence (articles 15º and 18º of the initial petition);
  • Omission of prior hearing (articles 16º and 19º to 21º of the initial petition);
  • Lack of the statements referred to in article 36º/2 of the CPPT (article 17º of the initial petition);
  • Error in the factual assumptions (articles 29º to 42º of the initial petition).

Let us examine each of them, bearing in mind that, pursuant to article 124º of the CPPT, being in question solely defects that lead to annulment of the act which is the subject of these proceedings, they should be examined in the order indicated by the Claimant.

The Claimant begins by alleging that "I was never notified of any ruling for alteration of my income tax return, whether from the Finance Director of Porto or from any official to whom he delegated such competence."

To this, the Tax Authority states that "the competent body under the terms of article 65º no. 5 of the IRS Code may be not only the finance director, but also the officials to whom he delegates this competence, whenever the high number of alteration acts justifies it," whereby "Since this delegation derives from the law, the decision of the Head of Division of the Finance Directorate of Porto, as a form of exercise of delegated competence, is valid and capable of producing legal effects in the tax-related legal sphere of the Appellant."

With all due respect, the Tax Authority is not deemed to be correct.

Indeed, contrary to what that authority proposes, the delegation of competence for the practice of the act of alteration of declared elements, under the terms of article 65º of the IRS Code, does not derive from the law. The law merely establishes the possibility of delegation of competence ("may be delegated"), remaining naturally within the discretion of the body in question (finance director) whether or not to exercise the delegation faculty, provided that the respective conditions are met (high number of acts to be performed).

Now, in this case no delegation act is known, and it is certain that any act performed under such delegation should make mention of it, under the terms of articles 36º/2 of the CPPT and 38º of the CPA, which does not occur.

There is thus a violation of the provisions of article 65º/5 of the IRS Code, with the consequent defect of lack of competence for the practice of the contested act, which generates its voidability.

The Claimant also alleges the omission of his right to prior hearing, enshrined in article 60º/1/a) of the LGT.

Acknowledging the omission of the Claimant's hearing, the Tax Authority argues in response that the same would be dispensed with, under the terms of no. 2 of the said article 60º of the LGT, since the assessment would have been made based on the return presented by the taxpayer.

It should be stated from the outset that the Tax Authority acknowledges that it did not proceed with the alterations that gave rise to the contested assessment based solely on the taxpayer's return, but that it did so on the basis of those and the "lack of proof that the expenses incurred were directly related to the source producing the income – the property, under the terms of article 41º of the IRS Code" (cf. article 38º of the reply).

Now, as Counselor Jorge Lopes de Sousa states in his CPPT annotated and commented [1], in an annotation to article 45º of the CPPT, the "formula 'based on the taxpayer's return' should be interpreted, in harmony with that constitutional guarantee, as meaning only to dispense with the hearing when the assessment is made in accordance with the position that derives from the taxpayer's return, in the factual and legal aspects." And the same Author adds: "Therefore, in cases where the assessment is made on the basis of the factual elements contained in the taxpayer's return, but with a different legal framework, the taxpayer's hearing cannot be dispensed with before the assessment is made."

The Administrative Supreme Court has also held that "Whenever there is the possibility that interested parties, through prior hearing, may influence the determination of the sense of the final decision, its omission generates voidability." [2]

In this framework, it should be understood that the Tax Authority had the burden of, prior to the assessment, hearing the Claimant, since the latter could not only validly challenge the judgment that "the expenses incurred were not proved to be directly related to the source producing the income – the property, under the terms of article 41º of the IRS Code," but also participate in the instruction of the tax procedure, offering evidence – including testimonial evidence – in support of the said proof.

This will not be hindered by the provisions of article 100º/1 of the CPA, even understanding that the same applies only where there is instruction, since this should always be understood from the perspective of legality. That is, only in cases where – by force of law – there was no instruction would prior hearing be dispensable, on pain of otherwise twice penalizing the interested party, in cases where the Administration omitted the due instruction and, based on that, the prior hearing.

In any case, understanding that, as is the case, the norm of article 60º/1 of the LGT is special in relation to the general norm of the CPA [3], it is concluded that the said dispensing of prior hearing in the case of lack of instruction – if it exists in the administrative procedure – will not be transposable to cases covered by that norm of the LGT.

The Tax Authority also cites, implicitly suggesting its applicability to the case, an insufficiently identified "Ruling of the Central Administrative Court, of 25/1/2000" [4].

First of all, it should be noted that the ruling in question pronounces itself on article 100º of the CPA, and not on article 60º/1 of the LGT, and as was explained above, the latter is considered to constitute a special norm, with differentiated contours, in relation to the former.

Furthermore, the abstract conclusion summarized in the summary of the decision in question is not subscribed to (not questioning, evidently, its adequacy in the concrete case it decided, in particular since the respective contours are not known, given that the decision is only available by summary), and understanding instead, in accordance with more current case law, that "Since the hearing of interested parties is intended to permit their participation in decisions affecting them, contributing to a full clarification of facts and a more appropriate and fair decision, the omission of such hearing constitutes the preterition of a legal formality leading to the voidability of the decision, unless it is manifest that the decision could only, in the abstract, have had the content that it had in concrete and that, therefore, its benefit by application of the general principle of preservation of the administrative act was imperative." [5]

In this manner, it not appearing (nor being sustained by the Tax Authority) that "it is manifest that" the contested decision "could only, in the abstract, have had the content it had in concrete," the same cannot be confirmed, in particular since, as has already been said, the Claimant could intervene in the instruction of the procedure, offering the evidence that appeared to be necessary to sustain its position.

Thus, understanding that the assessment in question in these proceedings should, imperatively, be preceded by prior hearing of the Claimant, the same is illegal and is also voidable on this ground.

The Claimant also attributes to the act against which it objects illegality arising from the lack of statements referred to in article 36º/2 of the CPPT, which provides that:

"Notifications shall always contain the decision, its grounds and means of defense and period to react against the notified act, as well as the indication of the body that performed it and whether it did so in the use of delegation or subdelegation of competences."

As Counselor Jorge Lopes de Sousa states [6], in an annotation to the article in question, "The lack of any of the requirements referred to in no. 2, when a procedural decision is notified, may affect the validity of the notification."

That is, the violation of the said norm does not affect the validity of the notified act, but only that of the notification act itself.

Now, the Claimant does not raise in the proceedings any claim that presupposes the nonexistence or invalidity of the notification of the tax act that it contests, which would happen if, for example, it raised the lapse of the right to assessment or the timeliness of an appeal which, having the notification date as reference, would not be timely.

Hence it appears that, in this case, the non-observance of the normative in question is incapable of reflecting on the validity of the act which is the subject of these proceedings.

The defects that have been examined prejudice the examination of the remaining matter raised (cf. article 608º/2 of the CPC).

Indeed, understanding that, as is the case, the preterition of formalities verified directly affects the materiality of the contested tax act, the substantive validity of the latter cannot be examined without the legally imposed procedures being previously ensured at that level.

In this manner, it is concluded that the last question raised by the Claimant, relating to the verification, in concrete, of error in the factual assumptions of the tax act with which we are concerned, should not be examined.

Finally, the Claimant also requests that the tax that it paid be returned to it, plus compensatory interest.

As decided in the Ruling of the Administrative Supreme Court handed down in case 0766/08, on 04-02-2009:

"Compensatory interest is not owed, as the existence of an error attributable to the Administration regarding the factual and legal assumptions of the assessment act, which was annulled on the exclusive ground of a defect of form due to the preterition of an essential formality, translated in the omission of the granting of the right of hearing before the assessment, cannot be established."

Applying the doctrine of the indicated ruling to the case sub iudice, it is understood that the said request should not be granted.

C. AWARD

On these grounds, this Arbitral Tribunal decides:

a) To judge the arbitral petition as well-founded and, consequently, to annul the tax act which is the subject of these proceedings due to the preterition of the legal formalities pointed out above;

b) To judge as unfounded the request for condemnation of the Respondent in the payment of compensatory interest;

c) To condemn the Respondent in the costs of the proceeding, in the amount of €306.00, taking into account what has already been paid.

D. Value of the Proceeding

The value of the proceeding is fixed at €1,716.92, under the terms of article 97º-A, no. 1, a), of the Tax Procedure and Proceeding Code, applicable by force of sections a) and b) of no. 1 of article 29º of the RJAT and of no. 2 of article 3º of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The amount of the arbitration fee is fixed at €306.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, since the petition was entirely well-founded, pursuant to articles 12º, no. 2, and 22º, no. 4, both of the RJAT, and article 4º, no. 4, of the cited Regulation.

Notify.

Lisbon

09 July 2014

The Arbitrator

(José Pedro Carvalho)

[1] Áreas Editora, 2006, Vol. 1, p. 395.

[2] Ruling of 12-07-2005, handed down in case 01586/03, available at www.dgsi.pt.

[3] In this sense, See Counselor Jorge Lopes de Sousa, op. cit., p. 389, annotation to article 45º.

[4] This is the Ruling handed down in case 1023/98, available in the Rulings section of the TCA-South of the DGSI website.

[5] Ruling of the Administrative Supreme Court of 22-01-2014, handed down in case 0441/13, available at www.dgsi.pt.

[6] Op. cit., p. 325.

Frequently Asked Questions

Automatically Created

What is the scope of arbitral tribunal competence in Portuguese IRS tax disputes under Decree-Law 10/2011?
The arbitral tribunals constituted under CAAD have material competence to review the legality of IRS assessments and liquidations pursuant to articles 2º(1)(a) and 30º(1) of Decree-Law 10/2011 (RJAT). This competence extends to additional IRS assessments, corrections made by Tax Authority following examination of tax returns, and disputes involving procedural defects (vícios de forma) such as lack of competence, omission of prior hearing, and errors in factual determinations. The tribunal must verify it is regularly constituted, that parties have legal standing and capacity, and that no nullities affect the proceedings before examining the merits of the case.
Can a taxpayer challenge an additional IRS income tax assessment through CAAD arbitration proceedings?
Yes, taxpayers can challenge additional IRS income tax assessments through CAAD arbitration proceedings. As demonstrated in Process 172/2014-T, a taxpayer successfully initiated arbitration under articles 2º(1)(a) and 10º(1)(a) of the RJAT to contest an additional assessment of €1,716.92 for fiscal year 2012. The process involves filing a request for constitution of an arbitral tribunal with CAAD, which notifies the Tax Authority. The Deontological Council appoints an arbitrator, and after a 30-day period for potential challenges, the singular arbitral tribunal is constituted. The Tax Authority submits its reply, parties present arguments, and the tribunal issues a binding arbitral award on the legality of the contested assessment.
What procedural defects (vícios de forma) can invalidate an IRS tax assessment in Portugal?
Several procedural defects (vícios de forma) can invalidate an IRS assessment in Portugal. In Process 172/2014-T, the tribunal examined four categories of defects in order of severity per article 124º CPPT: (1) lack of competence of the deciding official, particularly issues with delegation of powers from the Finance Director; (2) omission of prior hearing (audiência prévia), violating the taxpayer's constitutional right to be heard before adverse decisions; (3) absence of mandatory statements required by article 36º(2) CPPT, such as failing to indicate that the notification contains a draft decision; and (4) errors in factual assumptions underlying the assessment. These defects are considered annulment defects that can lead to the illegality declaration of the tax assessment, with competence and hearing violations being particularly fundamental.
How does the CAAD arbitral process work for contesting personal income tax (IRS) liquidations?
The CAAD arbitral process for contesting IRS liquidations follows a structured procedure under Decree-Law 10/2011. First, the taxpayer files a request for constitution of an arbitral tribunal and request for arbitral judgment with CAAD. The CAAD President accepts the request and automatically notifies the Tax and Customs Authority. The Deontological Council appoints an arbitrator for the singular tribunal, and parties are notified with the right to challenge the appointment within the applicable period. After 30 days without challenge, the tribunal is formally constituted. The Tax Authority submits its reply arguing the merits. Parties may waive the optional hearing under article 18º RJAT if unnecessary. Both sides present legal arguments and documentary evidence. The tribunal examines its competence, party standing, and any procedural issues before deciding the merits, ultimately issuing a binding arbitral award declaring the assessment legal or illegal.
What are the legal grounds for declaring the illegality of an additional IRS tax assessment in Portugal?
Legal grounds for declaring the illegality of an additional IRS assessment include both formal defects and substantive errors. Formal grounds (vícios de forma) encompass: incompetence of the deciding authority due to invalid or improper delegation of powers from the Finance Director (article 65º(5) IRS Code); violation of the right to prior hearing (audiência prévia), where the taxpayer is not properly notified or given adequate time to respond before the assessment is finalized; failure to include mandatory legal statements such as indicating a draft decision or providing reasoning; and procedural irregularities in notification. Substantive grounds include errors in factual determinations, such as incorrectly rejecting legitimate expenses without proper analysis of supporting documentation. Under article 124º CPPT, these defects are examined sequentially by severity, with competence and hearing violations being fundamental defects that automatically lead to annulment regardless of the substantive merits of the Tax Authority's position.