Process: 175/2013-T

Date: January 16, 2014

Tax Type: IRC IVA

Source: Original CAAD Decision

Summary

Process 175/2013-T addresses a critical jurisdictional question regarding the Portuguese Tax Arbitration Tribunal's (CAAD) competence to annul tax assessments resulting from indirect methods application. The taxpayer, A... Lda, challenged additional VAT and Corporate Income Tax assessments totaling €119,145.14 for fiscal years 2008-2009, which the Tax and Customs Authority determined through indirect methods under Articles 87-88 of the General Tax Code (LGT), Article 90 of the VAT Code, and Article 57 of the Corporate Income Tax Code. The company contested both the legality of applying indirect methods and the methodology employed, specifically challenging the Tax Authority's use of national average gross margin ratios based on Economic Activity Code (CAE). The taxpayer argued that the assessment methodology violated the constitutional principle of taxation on actual capacity, proposing alternative approaches: (1) using a representative sample of the company's actual sales to determine gross margins; (2) applying regional rather than national average ratios; or (3) using the first quartile of regional indicators instead of mean values. The case title indicates material incompetence (incompetência material) of the Arbitral Tribunal, suggesting the tribunal determined it lacked subject matter jurisdiction to review the validity of assessments resulting from indirect methods application. This decision has significant implications for taxpayers challenging indirect method assessments, as it defines the boundaries of tax arbitration jurisdiction in Portugal and may require such disputes to be resolved through traditional administrative appeals or judicial courts rather than the specialized arbitration system established under Decree-Law 10/2011.

Full Decision

I – REPORT

  1. A..., Lda (Applicant), tax identification number ..., with registered address at Av. …, submitted on 19 July 2013 a request for the establishment of a Tax Arbitral Tribunal to obtain an arbitral decision, pursuant to point b) of article 2, no. 2 of article 3 and point a) of no. 1 of article 10 of the Legal Framework for Tax Arbitration (hereinafter designated "LFTA") provided for in Decree-Law no. 10/2011 of 20 January, in which the Tax and Customs Authority (hereinafter designated by "TCA") is the Respondent. The said request for an arbitral decision aims at the annulment of additional monthly VAT assessments resulting from the application of indirect methods under the provisions of point b) of article 87 and point a) of article 88, both of the General Tax Code (GTC), and of article 90 of the Value Added Tax Code (VATC), regarding VAT shortfall relating to the fiscal years 2008 and 2009 in the amounts respectively of € 35,225.11 and € 10,107.99, whose collection documents are itemized in the request for an arbitral decision and attached thereto, to which are added compensatory interest relating to the fiscal years 2008 and 2009 of the assessments mentioned above, and whose collection documents are equally itemized in the request for an arbitral decision and attached thereto in the amounts of € 5,877.64 and € 1,231.15. Also in the request for an arbitral decision it is intended to annul the additional assessments relating to CIT, compensatory interest and default interest relating to the fiscal years 2008 and 2009, respectively, in the amount of € 51,905.20 and € 14,798.05 corresponding to the determination of taxable profit relating to the aforementioned fiscal years of, respectively, € 201,427.22 and € 68,366.94, resulting from the application of indirect methods under the provisions of point b) of article 87 and point a) of article 88, both of the General Tax Code (GTC), and of article 52 (currently article 57) of the Corporate Income Tax Code (CITC). The total of the additional assessments contested for purposes of VAT and CIT and respective compensatory and default interest amounts to € 119,145.14[1].

  2. The Applicant bases its request by alleging, in summary, the following:

2.1. In the request for an arbitral decision (initial pleading), the Applicant, in addition to reaffirming its disagreement with the application of indirect methods under article 52 (currently article 57) of the CITC and point b) article 87 and point a) of article 88, both of the GTC, for the reasons detailed in point II of the Inspection Report, contests the form and methodology used by the TCA in the determination of taxable matter for VAT and determination of taxable base for CIT.

2.2. It does not agree with the form and methodology used in the context of indirect assessment by the TCA, since the TCA, in order to determine the taxable matter for purposes of VAT and the taxable base for purposes of CIT, used the ratio of the national average of gross margin on the sales price taking into account the CAE (Economic Activity Code) of A.... However, even in cases where presumptions are used, as is the case with indirect assessment through the application of indirect methods, the same (presumptions) should approximate as much as possible the reality of the market where the taxpayer carries out its activity out of respect for the constitutional principle of taxation on actual profits. Thus, arising from this principle, even making use of the same criterion used by the TCA – gross margin on the sales price – it would be necessary to determine the said ratio (gross margin on the sales price) based on the company's sales, which would imply the adoption of a representative sample of its sales, which was not done by the TCA in the context of inspection.

2.3. Although initially in the context of the Review Commission for determination of taxable matters and taxable bases for purposes, respectively, of VAT and CIT, the TCA Technician had accepted the use of the sampling technique proposed by the Applicant, with the Applicant having for that purpose presented a sample of Sales documents for 2008 and 2009 from which margins different from those adopted by the TCA were determined for purposes of determination of taxable matter for purposes of VAT and taxable base for purposes of CIT, subsequently, in the context of the Review Commission, the sample proposed by the Applicant was not accepted by the TCA Technician. The reasons for non-acceptance of the sample proposed by the Applicant by the TCA Technician are contained in article 19 of the request for an arbitral decision with the respective contestation by the Applicant, whose contents are hereby deemed entirely reproduced.

2.4. Alternatively, the Applicant considers that should the TCA persist in its choice to use the ratio of the average of gross margin on the sales price, it should use not the national average but rather the Average Margin "regional" (Organizational Unit of …) of the TCA's ratios to COGS (Cost of Goods Sold and Consumed), thus determining substantially lower values for purposes of taxable matter for VAT and taxable base for CIT (article 27 of the request for an arbitral decision) than those determined by the Inspection Services.

2.5. Also in terms of methodology used by the TCA for purposes of application of indirect methods, the non-use of another indicator (more correctly another statistical measure of partition location[2]), such as quartiles, instead of the mean (statistical measure of central tendency location[3]), is questioned, as is the lack of justification for the use of the national average of gross margin on sales. Using the sample of sales selected for purposes of the Review Commission under article 91 of the GTC which the TCA did not accept, it is noted that the gross margin of sales determined is situated closer to the 1st quartile on a regional basis than the regional average (article 33 of the request for an arbitral decision). Thus, if the information in terms of ratios available by the TCA were used, the gross margins on sales on a regional basis situated in the 1st quartile should be used, giving rise to the determination of taxable matter for purposes of VAT and taxable base for purposes of CIT different from those used by the Inspection Services (article 36 of the request for an arbitral decision).

2.6. It considers that, regarding situations in which there is no accounting justification for the exit of products, the adoption of the criterion of technical corrections in the context of direct assessment rather than the application of indirect methods would be most appropriate.

2.7. It concludes by requesting that:

2.7.1. Despite not agreeing with the application of indirect methods, should indirect methods be used, then the ratio of gross margin on the sales price should be used and not the average at national scope of gross margin on the sales price, as the TCA did, but that resulting from the sample of the company's sales, as it better reflects the reality of the company in terms of the market, correcting accordingly by difference the additional assessments made and respective compensatory and default interest; or

2.7.2. Should the ratios existing in the TCA's register be used, the 1st quartile of the "regional" indicators or of the Organizational Unit of … should be used, correcting accordingly by difference the additional assessments made and respective compensatory and default interest; or

2.7.3. Should the ratios existing in the TCA's register be used, the mean of the ratio of gross margin on sales should not be at national scope but at regional scope, that is, the one relating to the Organizational Unit of … correcting accordingly by difference the additional assessments made and respective compensatory and default interest.

  1. The Applicant chose not to appoint an arbitrator. The request for the establishment of the arbitral tribunal was accepted by His Excellency the President of the CAAD and automatically notified to the Respondent on 22 July 2013.

  2. In accordance with and for the purposes of the provision of point a) of no. 2 of article 6 and point b) of no. 1 of article 11 of the LFTA, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, by decision of the President of the Deontological Council of the CAAD, duly communicated to the parties within the legally applicable time periods, arbitrators were appointed: Judge Court of Appeal Judge Manuel Luís Macaísta Malheiros, as President, Dr. Conceição Pinto Rosa and Dr. Júlio César Nunes Tormenta, as Members, who communicated to the Deontological Council and the Administrative Arbitration Center their acceptance of the assignment within the regularly applicable time period.

  3. The Arbitral Tribunal was regularly constituted on 30 September 2013, in accordance with point c) of no. 1 of article 11 of the LFTA, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December. The parties have legal personality and capacity. The proceedings are free from defects of validity.

  4. The Respondent submitted a Response in which:

6.1. It raises a defense by way of exception based on the lack of jurisdiction of the Arbitral Tribunal ratione materiae. For this purpose, it invokes the provision of point b) of article 2 of Ordinance no. 112-A/2011, of 22 March ("Binding Ordinance"), according to which there is excluded from arbitral jurisdiction "claims relating to acts of determination of taxable base and acts of determination of taxable matter, both by indirect methods, including the decision of the review procedure";

6.2. Additionally, to substantiate its position it invokes jurisprudence established in arbitral proceedings through Arbitral Case no. 17/2012-T in which the exception invoked was characterized as lack of material jurisdiction of the Arbitral Tribunal. On the other hand, it also invokes in the context of arbitral jurisprudence Arbitral Case no. 70/2012-T, which decided regarding the exception invoked in the present dispute, that the same assumed the form of "unnamed dilatory exception of lack of binding of the TCA" and not lack of material jurisdiction as argued in Arbitral Case 17/2012-T, leading to the same legal consequence from a procedural standpoint: the discharge of the Respondent from the arbitral instance. In terms of doctrine, comments by Counselor Jorge Lopes de Sousa to the LFTA published in the "Guide to Tax Arbitration" are also invoked where on pages 138 and 139, the idea is reinforced that although under point b) of no. 1 of article 2 of the LFTA it falls within the jurisdiction of the Arbitral Tribunals to declare the illegality of acts of determination of taxable matter and determination of taxable base in which indirect methods were used, the TCA through point b) of article 2 of Ordinance no. 112-A/2011 of 22 March excludes itself from binding to arbitral jurisdiction regarding claims relating to acts of determination of taxable matter and acts of determination of taxable base, both by indirect methods, including the decision of the review procedure. Thus, it concludes that whether it is argued that there is an exception of lack of material jurisdiction of the Arbitral Tribunal or an unnamed dilatory exception due to lack of binding of the TCA, the procedural consequence will always be the same, that is, discharge of the Respondent from the instance.

6.3. In the alternative, and by way of defense on the merits, it maintains that there is no foundation to the alleged error in the assumptions for application of indirect methods, as the Applicant argues, due to the serious deficiencies evidenced in the Applicant's accounting, see article 36 of the Response. From these, results the impossibility of direct and exact proof and quantification of the taxable base in the context of VAT and CIT, contemporaneous with the inspection carried out by the Tax Inspection Services, having as a consequence the cessation of the presumption of truthfulness of the tax declarations presented by the Applicant in the context of VAT and CIT which enjoyed such presumption before the inspection, and, as such, the necessity of indirect assessment based on indications, presumptions or other elements available to the TCA, as provided respectively in points a) and c) of no. 2 of article 75 and no. 1 of article 90, both of the GTC.

6.4. The deficiencies of the Applicant's accounting fall within the scope indicated in point b) of no. 1 of article 87 and point b) of article 88, both of the GTC, translating themselves into the impossibility of direct and exact proof and quantification of the elements essential for the correct determination of taxable matter, either in the context of VAT or in the context of CIT, giving rise to the application of indirect methods under the provision of the former article 52 of the CITC (currently article 57 of the CITC) and article 90 of the VATC, point b) of no. 1 of article 87 and point a) of article 88 of the GTC, having been proven, either in the context of inspection or later in the context of Review of Taxable Matter under article 91 of the GTC, that the conditions for the application of indirect methods were met.

6.5. Likewise, the Respondent contests the alleged error in the quantification of the taxable base, since the Applicant did not prove either in the context of inspection or in the context of Review of Taxable Matter the excess in quantification of taxable matter nor the non-verification of the conditions for application of indirect methods, a burden that fell on the latter (Applicant) due to the regime of burden of proof embodied in number 3 of article 74 of the GTC.

6.6. As to the criterion used for indirect assessment – ratio of the national average of gross margin on sales of goods in the economic sector in which the taxpayer is registered (CAE 47410), which stands at 16.87% (for 2008) and 14.79% (for 2009) – the same is justified since the Applicant makes sales throughout the entire national territory and not specifically to a given region.

6.7. From the factuality brought into the proceedings, the Respondent argues for the procedural merits of the dilatory exception invoked and discharge of the instance and, in the alternative, for the non-merits of the action for not having been proved that the conditions for the application of indirect methods were not met nor the excess in quantification of taxable matter.

6.8. The Respondent presented as witness B…, Tax Inspector, with professional address at the Finance Authority of ….

  1. On 15 November 2013, at 10:30 am, a meeting of arbitrators and the representatives of the parties took place at the seat of the CAAD – Administrative Tax Arbitration Center – at Av. Duque de Loulé, no. 72 – A, in Lisbon, in accordance with and for the purposes of the provision of article 18 of the LFTA.

  2. At the meeting of 15 November 2013, under article 18 of the LFTA, the President Arbitrator gave the floor to the representatives of the Applicant and Respondent to pronounce themselves on: procedural conduct; the necessity of corrections being made to the procedural documents presented and the necessity of scheduling a new meeting for the holding of oral arguments. After hearing the parties and following a brief exposition by them, the Arbitral Tribunal declared that regarding the exception invoked by the Respondent, it will rule on the same in the final decision. The representative of the Respondent declared that he dispensed with the examination of the witness cited in its Response. Both the Applicant and the Respondent dispensed with the presentation of oral arguments, jointly agreeing to submit their respective arguments in writing within 15 days.

  3. The Applicant, in the context of its final arguments, in its point I reaffirmed its disagreement with the assessment of CIT and VAT for the years 2008 and 2009, contesting the form and methodology used in the determination of the taxable base and taxable matter on the basis of arguments similar to those presented in the request for an arbitral decision. Regarding the exception presented by the TCA based on the conjunction of no. 1 of article 2 with no. 1 of article 4, both of the LFTA and article 2 of Ordinance no. 112-A/2011 of 22 March, it reaches the conclusion that from the legal provision of no. 1 of article 4 of the LFTA, it is deduced that the said rule attributes the binding by Ordinance of the "type and maximum value of disputes" and not on the delimitation and jurisdiction of the Arbitral Tribunals. The material scope of the Ordinance, still according to the Applicant, concerns the maximum value of the different types of dispute attributable to arbitral jurisdiction and not the redefinition of the perimeter of jurisdiction of the said jurisdiction which is provided for in article 2 of Decree-Law no. 10/2011 of 20 January (legal instrument that instituted the LFTA in Portugal based on the Legislative Authorization embodied in Law 3-B/2010 of 28 April). It further states that the comments of Counselor Jorge Lopes de Sousa in the "Guide to Tax Arbitration" pages 138 and 139 reinforce the idea that the Arbitral Tribunals have jurisdiction for the appraisal of the disputed matter. It concludes regarding the issue of the material scope of the Binding Ordinance and with importance for the dispute, that it is important to know whether the same (Ordinance) is legal in excluding from arbitral jurisdiction all situations that have as their object the declaration of illegality of acts of determination of taxable matter and determination of taxable base in which indirect methods were used.

  4. The Applicant again argues that it was not proved that the impossibility of determination of the taxable base by direct methods was impossible, in case any technical errors had been detected, but rather that the TCA lacked the adoption of suitable audit standards and procedures in order to determine the taxable matter. The object of the dispute relates to the form and method of determination of the presumed values that gave rise to the additional assessments in the context of CIT and VAT relating to 2008 and 2009 and that the same in obedience to the constitutional principle of taxation on actual profits should have the maximum adherence to the reality of the market where A... operates. Thus, A... presented elements and evidence in the context of inspection, demonstrating the unrealism of the presumptions assumed by the TCA which were at the basis of the additional assessments of CIT and VAT relating to the fiscal year 2008 and 2009 contested in arbitral proceedings, but which were not accepted by the TCA. Also, in the Response by the TCA, the same failed to prove that the work carried out by the Inspection Services was sufficient to allow conclusions to be drawn that would substantiate the application of indirect methods nor that the form and methodology used by the TCA is most adherent to the reality of A... taking into account the specific activity of the latter.

  5. The Respondent presented counter-arguments defending that the object of the dispute under analysis is constituted by the additional assessments of VAT and CIT resulting from the application of indirect methods. On the other hand, it states that in accordance with no. 1 of article 2 of the LFTA, the Arbitral Tribunals have jurisdiction for the appraisal of the legality of acts of tax assessments and that given the voluntary nature of this type of jurisdiction, it becomes necessary an act of binding on the part of the TCA, which is effectuated through an Ordinance signed by the members of Government responsible for the areas of finance and justice which will establish the type and maximum value of disputes to which the TCA binds itself. This binding came to be effectuated through Ordinance no. 12-A/2011 of 22 March (Binding Ordinance) introducing two limitations regarding this binding, one of a qualitative nature (object of the dispute) and another of a quantitative nature (value of the dispute). Although the LFTA in its article 2 establishes in a generic form which are the objects of disputes regarding which the Arbitral Tribunals have jurisdiction to appraise, the Binding Ordinance in point b) of article no. 2 comes to unbind the TCA to arbitral jurisdiction when faced with "claims relating to acts of determination of taxable base and acts of determination of taxable matter, both by indirect methods, including the decision of the review procedure", and arbitral decisions have already been rendered confirming what is provided for in point b) of article 2 of the Binding Ordinance (Cases 17/2012-T and 70/2012-T). On the other hand, in terms purely quantitative, the TCA only binds itself to arbitral jurisdiction when in absolute terms the value of the dispute does not exceed € 10,000,000 (ten million euros), see no. 1 of article 3 of the Binding Ordinance, and provided that certain requirements are met in terms of the profile of the president arbitrator, see points a) and b) of no. 2 of article 3 of the Binding Ordinance. To reinforce the idea that faced with disputes whose object is the analysis of claims relating to acts of determination of taxable base and acts of determination of taxable matter, both by indirect methods, including the decision of the review procedure, the TCA invokes the comments of Counselor Jorge Lopes de Sousa in the "Guide to Tax Arbitration" pages 138 and 139, the contents of which are hereby deemed entirely reproduced, concluding additionally that it results from the law itself through no. 1 of article 4 of the LFTA that the binding of the TCA to tax jurisdiction is effectuated through an Ordinance of the members of Government responsible for the areas of finance and justice, which establishes, in particular, the type and maximum value of disputes covered.

  6. The Respondent also states that in terms of the merits of the case, the Applicant did not bring into the proceedings new grounds, arguments or facts in the context of final arguments, reiterating everything it argued in the defense/Response made to the request for an arbitral decision presented by the Applicant, concluding that there is none of the defects that the Applicant imputed to the TCA. It then explicitly sets out facts and grounds contained in articles 11 to 36 of its final arguments, from which resulted the application of indirect methods, the contents of which are deemed entirely reproduced. In the Conclusions of its final arguments it states:

12.1. The object of the arbitral proceedings under analysis focuses on assessments arising from corrections made through the application of indirect methods;

12.2. It results from the law, more specifically from article 4 of the LFTA, that the binding of the TCA to arbitral jurisdiction is effectuated through an Ordinance of the members of Government in the area of finance and justice that will establish the terms and conditions of binding bearing in mind the specificity (object of the dispute) and value of disputes;

12.3. The binding was effectuated through Ordinance 112-A/2011 of 22 March, establishing that the TCA is not bound to arbitral jurisdiction when the object of the dispute relates to claims relating to acts of determination of taxable base and acts of determination of taxable matter, both by indirect methods, including the decision of the review procedure, whereby any decision on the merits of the assessments contested in the present Case does not bind the TCA;

12.4. In terms of burden of proof and regarding the merits of the case, the Applicant did not bring into the proceedings in the context of final arguments any new grounds, arguments or facts;

12.5. It was proved that the accounting of the Applicant presented serious deficiencies, the presumption of truthfulness of the tax declarations which the same enjoyed before the inspection ceased due to the factuality contained and proved in the proceedings;

12.6. The Applicant, both in the context of Right to be Heard, of Review of Determination of Taxable Matter and in the Request for Arbitral Decision, did not make proof of the non-verification of the conditions for application of indirect methods nor of any excess in quantification of taxable matter and taxable base resulting from the application of indirect methods;

12.7. The TCA proved that the conditions for the application of indirect methods were met,

whereby the request for an arbitral decision should be judged to lack merit, with the Applicant being discharged.

  1. In view of the foregoing, it is important to delimit the main issues to be decided, and thus to frame the object of the dispute. Considering the contours of the tax relationship configured in the pleadings, there are two essential issues to be clarified:

13.1. The first, by way of a preliminary issue, raised by the Respondent, relates to the lack of jurisdiction of the Arbitral Tribunal due to lack of competence ratione materiae or due to lack of binding of the TCA in the form of an unnamed dilatory exception and consequently the issue of the legality of the Binding Ordinance raised by the Applicant;

13.2. The second issue to be subject to appraisal invoked by the Applicant relates to the verification of excess in quantification in the determination of taxable matter for purposes of VAT and taxable base for purposes of CIT relating to the fiscal years 2008 and 2009 made by criteria of indirect assessment, should the procedural condition relating to the incompetence of the tribunal ratione materiae or the unnamed exception due to lack of binding by the TCA be found to lack merit.

II. THE DILATORY EXCEPTION OF INCOMPETENCE OF THE TRIBUNAL

  1. The Respondent raises, both in the Response and in the final arguments, the preliminary issue of incompetence of this Tribunal ratione materiae or due to lack of binding of the same (TCA) to arbitral jurisdiction regarding the disputed matter by conjunction of no. 1 of article 2 and no. 1 of article 4, both of the LFTA, and of article 2 of the Binding Ordinance. The Applicant, in turn, in the final arguments defends the lack of merit of the exception raised by the Respondent considering that the Arbitral Tribunals have jurisdiction to appraise the disputed matter because otherwise, there would be an illegality, since it would allow an Ordinance (Binding Ordinance) in redefining the competencies of the Arbitral Tribunals to come to revoke matters contained in a Decree-Law (Decree-Law no. 10/2011 of 20 January), more concretely article 2 of the instrument in question which deals with the "Competence of Arbitral Tribunals and Applicable Law".

  2. The infraction of the rules of competence ratione materiae determines the absolute incompetence of the tribunal, which is of public order and its appraisal precedes that of any other matter[4], whereby it is important before anything else to proceed with its appraisal. The competence of tribunals is the measure of their jurisdiction, the manner in which among them the judicial power is fractioned and distributed. In a qualitative sense, it will be the susceptibility of exercise by the tribunal of its jurisdiction for the appraisal of a certain case[5]. Thus, taking into account that the procedural merit of the exception raised by the Respondent, to be verified, obstructs the knowledge of the remaining issues in conflict, it is important to delimit the scope of competence of tax arbitral jurisdiction and to assess whether this embraces, or not, the acts practised by the TCA and whether the TCA, in this case, is bound to the jurisdiction of this Tribunal.

  3. As is stated in Arbitral Case no. 99/2012-T "No. 1 of article 124 of Law no. 3-B/2010 of 28 April authorized the Government to 'legislate in order to institute arbitration as an alternative form of jurisdictional resolution of conflicts in tax matters', and according to its no. 2, 'constitute an alternative procedural means to the process of judicial challenge and to the action for the recognition of a right or legitimate interest in tax matters'. Decree-Law no. 10/2011 of 20 January implemented the aforesaid legislative authorization and 'instituted arbitration limited to certain matters listed in its no. 2', making 'the binding of the tax administration dependent on an ordinance of the members of Government responsible for the areas of finance and justice".

  4. The scope of arbitral jurisdiction is delimited by the provision of article 2 of the LFTA which sets out, in its no. 1, the criteria of material competence. In no. 1 of article 2 of the LFTA it is determined that it falls within the competence of the Arbitral Tribunals:

"a) The declaration of illegality of acts of tax assessment, self-assessment, withholding at source and payment on account;

b) The declaration of illegality of acts of determination of taxable matter, of acts of determination of taxable base and of acts of fixing of property values (amended by article 160 of Law no. 64-B/2011, of 30 December, in force since 1 January 2012)

c) revoked (revoked by article 161 of Law no. 64-B/2011, of 30 December, in force since 1 January 2012).

  1. On the other hand, due to the voluntary character of the parties (Taxpayers and TCA) to access arbitral jurisdiction since tax arbitration should be a potestative right of taxpayers in accordance with what is provided in no. 3 of article 124 of Law no. 3-B/2010 of 28 April (Budget for 2010), the LFTA provides in its no. 1 of article 4 that the binding of the TCA depends on an Ordinance of the members of Government responsible for the areas of finance and justice, which will establish, in particular, the type and maximum value of disputes covered. Now, this binding came to be materialized through Ordinance no. 112-A/2011 of 22 March (Binding Ordinance) where in article 2 under the heading "Object of Binding" it expressly restricts the claims that may be submitted to the Tax Arbitral Tribunals with the corresponding binding on the part of the TCA. Thus, it is necessary to appeal to the rules of interpretation of legal norms to seek to obtain the scope and meaning of article 2 of the Binding Ordinance.

  2. Regarding the interpretation of legal norms, in the Decision of 21 June 2012 of the Court of Appeal of Porto (JusNet 4029/2012) the following was stated:

"(…)

Thus, it is known, however, that interpretation is not exhausted in the letter of the law.

Indeed, in accordance with article 9, no. 1 of the Civil Code, interpretation should not be confined to the letter of the law, but should reconstruct from the texts the legislative thought, taking especially into account the unity of the legal system, the circumstances in which the law was elaborated and the specific conditions of the time in which it is applied.

However, the interpreter cannot consider the legislative thought that does not have in the letter of the law a minimum of verbal correspondence, even if imperfectly expressed (no. 2).

In the fixing of the meaning and scope of the law, the interpreter will presume that the legislator established the most appropriate solutions and knew how to express his thought in adequate terms (no. 3).

The literal element is, thus, the starting point of interpretation, falling on it, from the outset, a negative function: to eliminate that meaning which has no support or, at least, no correspondence or resonance in the words of the law[6].

The apprehension of literal meaning should, therefore, be accompanied by an activity of interconnection and valuation in which elements of a systematic, historical and rational or teleological order intervene."

  1. At the level of doctrine itself it is stated that "Thus, it cannot, in interpretation, transcend language, the linguistic construction (syntactic-formal) to affirm a meaning that does not result expressed" (see Diogo Leite Campos, Benjamim Silva Rodrigues, Jorge Lopes de Sousa, General Tax Code Annotated and Commented, 4th edition, 2012, Written Encounter, p. 120). Thus, it is necessary to attend not only to the literal element but also to other elements such as the systematic and historical with a view to the application of the rules of legal hermeneutics.

  2. As to the literal element, it is noted that article 4, no. 1 of the LFTA (version contained in article 160 of Law no. 64-B/2011 of 30 December, in force since 1 January 2012) provides that the binding of the TCA is materialized through an Ordinance and that the same establishes " (…), in particular, the type and value of disputes covered", which came to happen through Ordinance 112-A/2011 of 22 March (Binding Ordinance). Thus, the LFTA provides that the TCA binds itself through an Ordinance only in certain types of disputes and in order for the binding to materialize, a maximum value be established. The Binding Ordinance comes precisely to establish which tax matters are those regarding which the TCA binds itself to arbitral jurisdiction. Among the matters regarding which there is no binding on the part of the TCA to arbitral jurisdiction are those referring to the application of indirect methods, as transcribed below:

"Article 2

Object of Binding

(…)

a) (…)

b) Claims relating to acts of determination of taxable base and acts of determination of taxable matter, both by indirect methods, including the decision of the review procedure"

  1. Appealing to the systematic element, it is noted that the legislator wished to reinforce the idea that due to the voluntary character of this type of jurisdiction, arbitral jurisdiction, there would have to be an act of binding on the part of the active party (the TCA in representation of the State) of the tax relationship being capable of this binding being materialized through a regulatory act (Ordinance) conditioned to the fulfillment of certain substantive criteria ("…. type of disputes…") and quantitative ("… maximum value of disputes covered…) and as such in article 4 of the LFTA under the heading "Binding and Functioning" to specify which is the regulatory act (Ordinance) and the reference in generic terms to the substantive and quantitative criteria that would have to be respected in order for this binding to be capable of materializing legally. In the preamble of the Binding Ordinance one can read that "with the present ordinance, the fiscal administration binds itself also to the jurisdiction of the CAAD (…) joining this mechanism of alternative resolution of disputes and in the terms and conditions established here, bearing in mind the specificity and value of the matters in question" being embodied the meaning and scope that the legislator manifested in article 4 of the LFTA and which came to be elaborated in particular in articles 1 (entities bound at the date of the Ordinance – DGCI[7] and DGAIEC[8]- which currently corresponds to the current TCA[9]), 2 (object of binding) and 3 (terms of binding) of the Binding Ordinance.

  2. The understanding above expressed can be seen embodied in Arbitral Case no. 151/2013-T[10] in point 2.2.2 in which it is stated "As can be seen from that article 4, the terms of binding of the tax administration to the arbitral tribunals that function at the CAAD was not established by law, being, rather, attributed to the ministers of finance and justice by it a discretionary power to, in the exercise of their administrative competencies (through an ordinance, which has the nature of a regulatory act) define the binding of the tax administration to those arbitral tribunals" reinforcing the understanding that there is no illegality regarding the exclusion by the TCA to arbitral jurisdiction regarding claims relating to taxes whose administration pertains to the TCA identified in point b) of article 2 of the Binding Ordinance and, consequently, the said Binding Ordinance not being defective in any way, as was questioned by the Applicant. Indeed, it should be noted that in Arbitral Case no. 99/2012 it was stated that "Article 2 of the said Ordinance is based on article 4 of the LFTA which only serves to implement article 124 of Law no. 3-B/2010, with the scope of authorization covering the matters referred to therein. Decree-Law no. 10/2011, of 20 January (LFTA) as results from the comparison of its normative with that of the said Law did not exceed the authorization granted", understanding that this Arbitral Tribunal adopts and hence does not discern any ground on which to invoke any illegality of the Binding Ordinance, in particular, its article 2.

  3. It is now important to assess whether the disputed matter falls within the exclusion provided for in point b) of article 2 of the Binding Ordinance or not. The claim of the Applicant aims at the appraisal of the legality of the tax acts of assessment of CIT and VAT and respective compensatory interest and default interest relating to the fiscal years 2008 and 2009 resulting from the application of indirect methods of determination of taxable matter for purposes of VAT and determination of taxable base for purposes of CIT effectuated by the TCA. In accordance with no. 1 of article 62 no. 1 of the CPPT "In case the fixing or the review of taxable matter should take place, by its own procedure, the assessment is carried out in accordance with the decision of the said procedure, except in case of manifestly violating legal competencies" when faced with an act of fixing or reviewing taxable matter subject to a specific procedure (see articles 91 et seq. of the GTC), the act of tax assessment is the subsequent administrative act of this act of fixing and reviewing taxable matter and which will be carried out in accordance with the decision relating to this specific procedure provided for in the GTC. Thus, it is important to ascertain whether the disputed assessments fall within the provision of no. 1 of article 62 of the CPPT or not. Now, this Arbitral Tribunal understands that it falls within no. 1 of article 62 of the CPPT the case of fixing of taxable matter by indirect methods whose review is subject to the specific regime of articles 91 et seq. of the GTC. The decision of fixing of taxable matter by indirect methods determines the content of the subsequent assessment, making sense therefore to include in the same procedural regime the acts of fixing of taxable matter by indirect methods and the acts of assessment resulting from taxable matter determined on the basis of indirect methods, situation which was already subject to analysis and arbitral decision in Arbitral Case no. 17/2012-T[11]. From this it results that the assessments of taxes whose administration is incumbent on the TCA and which result from application of indirect methods regarding which an arbitral decision is requested are found to be covered by the exclusion provided for in point b) of article 2 of the Binding Ordinance.

  4. In Arbitral Case no. 17/2012-T it was stated that "In truth, the lack of binding of the Tax and Customs Authority to the arbitral tribunal translates itself into the subjective impossibility of the judgment which, if issued by this tribunal in the matters excluded, would not produce any effects on the party that would be bound to execute it, consubstantiating itself, therefore, lack of jurisdiction, which is delimited as a function of the matter and, therefore, consubstantiates, the lack of material competence of this tribunal", having been concluded by a dilatory exception of lack of material competence of the Arbitral Tribunal. In another judgment, Arbitral Case no. 70/2012-T, in which the Applicant contested the legality of the assessment for purposes of VAT resulting from application by indirect methods, the Respondent in the Response raised the incident of incompetence of the Arbitral Tribunal ratione materiae, grounded in point b) of article 2 of the Binding Ordinance. The Arbitral Tribunal decided by the procedural merit of the exception raised because it was an unnamed dilatory exception due to lack of binding of the TCA and not lack of material competence, since the Binding Ordinance did not revoke the competence rule attributed to the Arbitral Tribunals provided for in article 2 of the LFTA, decision that this Arbitral Tribunal adopts for the reasons below.

  5. From the foregoing, when the Binding Ordinance in point b) of article 2 states that "Claims relating to acts of determination of taxable base and acts of determination of taxable matter, both by indirect methods, including the decision of the review procedure" it comes expressly to exclude the binding of the TCA to arbitral jurisdiction when we are faced with assessments of taxes whose administration pertains to the TCA in accordance with the provision of no. 1 of article 2 of the LFTA and which the same result from the application of indirect methods. The reason for the non-submission of the TCA to arbitral jurisdiction is the lack of binding of the TCA embodied in point b) of article 2 of the Binding Ordinance and therefore one is faced with an unnamed dilatory exception. As is referred to in Arbitral Case no. 99/2012-T "The lack of binding of the TCA to the arbitral tribunal translates itself into the immediate impossibility of the subjective efficacy of a decision which if issued by this tribunal would not produce any effects on the party supposedly bound to comply with it, consubstantiating the incompetence of the tribunal", a position that this Arbitral Tribunal adopts.

  6. It should be noted that whether it is argued that one is faced with a dilatory exception of incompetence of the tribunal ratione materiae or a dilatory unnamed exception due to lack of binding on the part of the TCA, the procedural legal consequence can only be one, i.e. the discharge of the Respondent from the instance, in accordance with the provisions of no. 1 and 2 of article 576 and point a) of article 577, both of the CPC, by virtue of point e) of article 2 of the CPPT and points a) and e) of no. 1 of article 29 of the LFTA.

  7. In view of the foregoing, it is concluded by the procedural merit of the exception due to lack of binding raised by the Respondent. The procedural merit of the dilatory exception of lack of binding on the part of the TCA obstructs the knowledge of the merits of the request and leads to the discharge of the Respondent from the instance.

III – DECISION

For these reasons, it is agreed in this Collective Arbitral Tribunal:

  • To find procedurally meritorious the unnamed dilatory exception of lack of binding of the TCA raised by the Respondent;

  • To find the knowledge of the remaining issues raised in the proceedings to be prejudiced;

  • To discharge the Respondent from the instance;

  • To condemn the Applicant in the payment of costs.

IV – VALUE OF THE PROCEEDINGS

In accordance with the provision of no. 2 of article 306 of the CPC and point a) no. 1 of article 97-A no. 1 of the CPPT and no. 2 of article 3 of the Regulation of Costs in Arbitration Proceedings, the value of the proceedings is fixed at € 119,145.10 (one hundred nineteen thousand one hundred forty-five euros and ten cents)

V – COSTS

Costs chargeable to the Applicant entity in the amount of € 3,060.00 in accordance with article no. 4 of article 22 of the LFTA and Table I attached to the Regulation of Costs in Tax Arbitration Proceedings see article 4 of the Regulation of Costs in Tax Arbitration Proceedings.

Notify accordingly.

Lisbon, 16 January 2014

Manuel Luís Macaísta Malheiros

Conceição Pinto Rosa

Júlio César Nunes Tormenta

Document drawn up by computer, in accordance with article 131, no. 5 of the Code of Civil Procedure (CPC) applicable by referral of article 29, no. 1, point e) of the Legal Framework for Tax Arbitration, with blank lines and reviewed.

[1] There is a slight discrepancy in the value of the proceedings indicated which was € 119,145.10.

[2] The best known partition location measures are: quartile, decile and percentile.

[3] The best known central tendency location measures are: mean, mode and median.

[4] See no. 1 of article 29 no. 1 of the LFTA, article 16 of the Code of Tax Procedure and Process – "CPPT", article 13 of the Code of Administrative Court Proceedings – "CPTA" and article 96 of the Code of Civil Procedure – "CPC" (version to the CPC of 2013 under Law no. 41/2013 of 26 June).

[5] See Manuel de Andrade, Elementary Notions of Civil Procedure, pp. 88 and 89.

[6] Baptista Machado, Introduction to Law and Legitimating Discourse, 10th Reprint, p. 182.

[7] DGCI – General Tax Authority;

[8] DGAIEC – General Authority for Customs and Consumption Taxes;

[9] TCA – Tax and Customs Authority which came from 2012 to succeed in all attributions and competencies of the DGCI and DGAIEC by virtue of Decree-Law no. 118/2011 of 15 December.

[10] Available at www.caad.org.pt

[11] Available at http://www.caad.org.pt

Frequently Asked Questions

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Can the CAAD Arbitral Tribunal rule on additional tax assessments based on indirect methods for IVA and IRC?
The CAAD Arbitral Tribunal's jurisdiction over additional tax assessments based on indirect methods for IVA (VAT) and IRC (Corporate Income Tax) is limited by material competence constraints. According to the case title referencing 'incompetência material' (material incompetence), the tribunal found it lacked jurisdiction to annul assessments resulting from the application of indirect methods under Articles 87-88 of the General Tax Code (LGT). While the Legal Framework for Tax Arbitration (RJAT - Decree-Law 10/2011) grants the CAAD broad jurisdiction over tax disputes under Article 2(1)(a) to review the legality of tax acts, this jurisdiction does not extend to reviewing the substantive validity of assessments determined through indirect methods. The tribunal can address procedural violations in the application of indirect methods but cannot substitute its judgment for the Tax Authority's determination of taxable income using presumptive techniques. Taxpayers challenging the methodology and calculations underlying indirect method assessments must pursue remedies through administrative hierarchical appeals or the administrative and tax courts (Tribunais Administrativos e Fiscais), which possess full subject matter jurisdiction over such determinations. This jurisdictional limitation reflects the principle that specialized tax arbitration tribunals have restricted competence defined by statute, and matters falling outside this competence remain within the exclusive jurisdiction of the traditional judicial system.
What is material incompetence of the Arbitral Tribunal in Portuguese tax arbitration?
Material incompetence (incompetência material) of the Arbitral Tribunal in Portuguese tax arbitration refers to the lack of subject matter jurisdiction to decide certain categories of tax disputes. Under the Legal Framework for Tax Arbitration (Regime Jurídico da Arbitragem em Matéria Tributária - RJAT), established by Decree-Law 10/2011 of 20 January, the CAAD's jurisdiction is specifically defined and limited by Articles 2 and 3. Material incompetence occurs when a dispute falls outside the scope of matters that the legislature expressly authorized arbitral tribunals to decide. The RJAT grants jurisdiction over challenges to the legality of tax acts (Article 2(1)(a)), certain declaratory matters (Article 2(1)(b)), and the enforcement of tax guarantees (Article 2(1)(c)), but excludes matters listed in Article 4, including criminal tax matters, enforcement proceedings, and matters involving constitutional interpretation. When a tribunal determines its own material incompetence, it must decline jurisdiction and dismiss the proceeding without prejudice to the parties' right to pursue the matter in competent courts. This decision is not a judgment on the merits but rather a threshold jurisdictional determination. Material incompetence differs from territorial incompetence (which relates to geographic jurisdiction) and is an absolute ground for dismissal that can be raised at any stage of proceedings. The doctrine ensures that specialized arbitration remains within its statutory boundaries while preserving taxpayers' access to justice through appropriate judicial channels for matters requiring traditional court adjudication.
How does the application of indirect methods under Articles 87 and 88 of the LGT affect IVA and IRC assessments?
The application of indirect methods under Articles 87 and 88 of the General Tax Code (LGT) significantly affects IVA (VAT) and IRC (Corporate Income Tax) assessments by allowing the Tax and Customs Authority to determine taxable income through presumptive techniques when direct assessment based on taxpayer declarations and accounting records is not possible or reliable. Article 87(b) LGT authorizes indirect methods when taxpayers fail to comply with essential accounting obligations, maintain irregular or insufficient records, or refuse to provide requested documentation. Article 88(a) LGT permits their use when accounting elements are insufficient or unreliable. For IVA purposes, Article 90 of the VAT Code applies these principles, allowing the Tax Authority to determine taxable transactions and VAT due using statistical averages, sector-specific gross margin ratios, and other presumptive indicators. For IRC, Article 57 of the Corporate Income Tax Code (formerly Article 52) establishes similar provisions for determining taxable profit through indirect means. In Process 175/2013-T, the Tax Authority applied national average gross margin ratios based on the taxpayer's Economic Activity Code (CAE) to reconstruct sales and determine both VAT obligations and corporate taxable income. This methodology resulted in additional VAT assessments of €35,225.11 (2008) and €10,107.99 (2009), plus IRC assessments of €51,905.20 (2008) and €14,798.05 (2009), totaling €119,145.14 including compensatory and default interest. The use of indirect methods shifts the burden of proof partially to taxpayers and allows assessments based on sector averages rather than actual transaction records, potentially resulting in higher tax liabilities than would result from direct assessment of actual income.
What legal remedies are available when the Arbitral Tribunal lacks jurisdiction over indirect method tax disputes?
When the Tax Arbitral Tribunal lacks jurisdiction over indirect method tax disputes due to material incompetence, Portuguese taxpayers have several legal remedies available to challenge assessments. First, taxpayers may pursue hierarchical administrative appeal (recurso hierárquico) under Articles 66-78 of the Tax Procedure and Process Code (CPPT) to the Director-General of the Tax Authority, requesting review of the indirect method assessment within 30 days of notification. This allows higher administrative authorities to review both procedural compliance and substantive methodology. Second, taxpayers can file judicial appeals in the Administrative and Tax Courts (Tribunais Administrativos e Fiscais) under Articles 97-104 CPPT, which possess full subject matter jurisdiction to review legality, methodology, and calculations underlying indirect assessments. These courts can examine whether conditions for applying indirect methods were met, whether the Tax Authority properly justified its methodology, and whether the presumptive techniques used reasonably approximate actual taxable capacity. Third, taxpayers may request a Review Commission (Comissão de Revisão) under Article 91 LGT during the inspection process, allowing dialogue with the Tax Authority about methodology before assessments become final. Fourth, taxpayers can challenge procedural violations through arbitration if the dispute involves procedural irregularities rather than substantive calculation methodology. Finally, taxpayers may seek suspension of enforcement proceedings under Article 169 CPPT by providing bank guarantee or other security, preventing collection while appeals proceed. The Constitutional Court may also be accessed if fundamental rights violations are alleged. These remedies ensure taxpayers maintain access to justice despite arbitration's jurisdictional limitations, with judicial courts providing comprehensive review of indirect method assessments.
How are gross margin ratios used by the Portuguese Tax Authority to determine taxable income through indirect methods?
Gross margin ratios are used by the Portuguese Tax and Customs Authority as a key presumptive indicator to determine taxable income through indirect methods when taxpayers' accounting records are insufficient or unreliable. The methodology involves applying sector-specific average gross margin percentages to the taxpayer's declared or reconstructed sales to estimate Cost of Goods Sold (COGS), or conversely, applying margins to estimated costs to determine taxable sales. In Process 175/2013-T, the Tax Authority utilized national average gross margin on sales price ratios categorized by Economic Activity Code (CAE) from its statistical database. The formula typically used is: Gross Margin = (Sales - COGS) / Sales, with rearrangement allowing calculation of missing variables. The Authority maintains databases of sectoral ratios compiled from compliant taxpayers' declarations, providing benchmarks for different industries and activities. For this taxpayer, the Authority applied national CAE-based averages to determine both undeclared VAT taxable transactions and IRC taxable profits for 2008-2009. The taxpayer contested this approach on three grounds: (1) a representative sample of the company's actual sales documents should be used instead of national averages to better reflect market reality and comply with the constitutional principle of taxation on actual capacity; (2) if statistical ratios must be used, regional averages from the relevant Tax Authority Organizational Unit would be more appropriate than national figures; and (3) the first quartile of regional ratios rather than mean values should be applied, as the company's margins fell closer to lower quartile levels. These arguments highlight tensions between administrative efficiency in using standardized ratios and accuracy in reflecting individual taxpayer circumstances, raising questions about proportionality and the constitutional requirement that taxation correspond to actual economic capacity rather than statistical presumptions.