IRS Category B Simplified Regime: Burden of Proof Under Article 31(1)(c) CIRS - CAAD Case 18/2019-T

ARBITRAL DECISION

REPORT

A - PARTIES

A..., holder of tax identification number..., with tax domicile at Rua..., n.º..., in Porto, hereinafter designated as Claimant or Taxpayer.

TAX AND CUSTOMS AUTHORITY (which succeeded the General Directorate of Taxes, by means of Decree-Law No. 118/2011, of 15 December), hereinafter designated as TA or Respondent.

On 10-01-2019, the request for constitution of the Arbitral Tribunal was accepted by His Excellency the President of CAAD, and the Tax and Customs Authority was automatically notified, as evidenced in the respective minutes.

The Claimant did not proceed with the appointment of an arbitrator, wherefore, under the provisions of No. 1 of Article 6 and subparagraph b) of No. 1 of Article 11 of Decree-Law No. 10/2011, of 20 January, with the wording introduced by Article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council designated as arbitrator His Excellency Dr. Paulo Ferreira Alves, who communicated his acceptance, in accordance with legal provisions.

On 04-03-2019 the parties were duly notified of this appointment, and expressed no objection to it, in accordance with Article 11 No. 1, subparagraphs a) and b), of the Arbitral Tribunal Regulations and Articles 6 and 7 of the Deontological Code.

Thus, in compliance with the provision of subparagraph c) of No. 1 of Article 11 of Decree-Law No. 10/2011, of 20 January, with the wording introduced by Article 228 of Law No. 66-B/2012, of 31 December, the Singular Arbitral Tribunal was regularly constituted on 25-03-2019.

Both parties agreed to waive the holding of the meeting provided for in Article 18 of the Arbitral Tribunal Regulations.

The Arbitral Tribunal was regularly constituted and is materially competent, in accordance with Articles 2, No. 1, subparagraph a), and 30, No. 1, of Decree-Law No. 10/2011, of 20 January.

The parties possess legal personality and capacity, are legitimate and are legally represented (Articles 4 and 10, No. 2, of the same legal instrument and Article 1 of Ordinance No. 112-A/2011, of 22 March).

The proceedings are not affected by defects that would render them invalid.

B - REQUEST

1. The Claimant petitions for a declaration of partial illegality of the tax assessment act in respect of Personal Income Tax for the year 2017, bearing number 2018....

C - CAUSE OF ACTION

1. In support of his request for an arbitral decision, the Claimant alleged, in summary, with a view to declaring the illegality of the tax assessment act in respect of Personal Income Tax, already described in point 1, the following:

2.1. With reference to the year 2017, he submitted his annual income tax return, Form 3, in which he declared income from dependent employment and self-employment, the latter under the simplified regime for determining taxable income.

2.2. In Annex A to Form 3, he declared as dependent employment income the sum of €26,120.92.

2.3. In Annex B to Form 3, he declared as self-employment income the sum of €11,250.00 relating to income from the exercise of professional activities specifically provided for in the table of Article 151 of the Personal Income Tax Code (field 403) and the sum of €14,945.61 relating to income from other service provision (field 404).

2.4. By decision of the Head of the Finance Services of Porto-..., the income timely declared by the Claimant in Form 3 were subject to correction.

2.5. The Claimant maintains that he was not notified of this amendment decision.

2.6. On 19-09-2018, the Finance Services of Porto-... issued an Official Declaration bearing number....

2.7. Following this, on 8-10-2018 Assessment No. 2018... was issued relating to Personal Income Tax for 2017.

2.8. The Claimant maintains that the impugned Assessment was based on an alteration of the self-employment income declared by the Claimant, in that it considered field 404 of Annex B with a null value and had the amount of €26,195.61 entered in field 403 of Annex B.

2.9. He states that under the simplified regime the self-employment income referred to in field 404 of the Annex are brought to taxable income at 35% of its amount.

2.10. And that, in turn, the self-employment income referred to in field 403 of Annex B are brought to taxable income at 75% of its amount.

2.11. Which, according to the Claimant, means that, owing to the alterations made to the income declared by him, his taxable income was – illegally, as he will demonstrate – increased by €5,978.75.

2.12. In accordance with the income declaration timely submitted by him, the net income of category B would have been €13,667.96, resulting from: a. The application of the coefficient 0.75 to income declared in field 403 of Annex B to Form 3, thus making a net income of €8,437.00, and b. the application of the coefficient 0.35 to income declared in field 404 of Annex B to Form 3, thus making a net income of €5,230.96.

2.13. However, the impugned Assessment was based on the net income of category B resulting from the application of the coefficient 0.75 to all gross income of that category, thus making a net income of €19,646.71.

2.14. The Claimant argues that the service provision corresponding to Invoices No. 1000000 and No. 1000001 were not provided by the Claimant within the scope of his activity as a lawyer, and that this was declared in the content of the said invoices.

2.15. The same applies to the service provision corresponding to receipt-invoices Nos. 38, 41 and 43, arguing that the TA advances not a single fact or argument that would support the conclusion that the service provision covered by such receipt-invoices would be "connected" with the activity of lawyer.

2.16. He argues that the impugned Assessment is vitiated by: - Illegality resulting from legal ineffectiveness of the act that altered the income declared by the Claimant; - Illegality resulting from violation of the principle of presumption of veracity of taxpayers' declarations; - Illegality resulting from violation of the principle of procedural participation.

D - RESPONSE OF THE RESPONDENT

1. The Respondent, duly notified for this purpose, timely submitted her response, alleging in summary as follows:

3.1. From the analysis of the record of activity codes in the register of the Claimant's activities, the following activity codes were verified: - Code 6010 - Lawyer (main activity) and; - Code 1519 - other service providers (secondary activity) - Activity code 69101 - legal activities and code 90030 - Artistic and literary creation (secondary activities) in accordance with the Portuguese Classification of Economic Activities (CAE) of the National Institute of Statistics.

3.2. The Respondent argues that, given that the service provided by a lawyer or legal consultant, due to the requirement of various knowledge and competencies, and subject to its own ethical and deontological principles, with its own rules of conduct of trust, competence and prudence, which by the complexity it encompasses, is far more than a simple undifferentiated and generic service provision such as that provided for by code 1519 - other service providers (from the table appended to Article 151 of the Personal Income Tax Code).

3.3. It is verified that the instructions for completing the forms intended for compliance with the declarative obligation provided for in No. 1 of Article 57 of the Personal Income Tax Code are clear, comprehensible and clarify that "Field 403, of table 4-A of Annex B, of Form 3 of Personal Income Tax, is intended for the indication of income earned in the exercise, on own account, of any service provision activity that falls within subparagraph b) of No. 1 of Article 3 of the Personal Income Tax Code, regardless of whether the activity carried out is classified according to the Portuguese Classification of Economic Activities (CAE), of the Institute of Statistics, or in accordance with the codes mentioned in the table of activities approved by Ordinance No. 1011/2001, of 21 August, with the exclusion of the activity with code 1519 - other service providers.

3.4. Income obtained within the scope of the activity of lawyer or legal consultant, whether exercised in strict compliance with the rules of the legal profession, or materialized in another form of self-employment service provision, namely as legal consultant, legal consultancy, legal arbitration, legal representation, are classified as category B income in the Personal Income Tax Code - business and professional income in Article 3 of the aforementioned code, according to which professional income, when earned on own account, from service provision activity, including scientific, artistic or technical activities, whatever their nature, even if connected with other activities and declared in Annex B, field 403, are subject to taxation by Article 31, No. 1, subparagraph b) of the Personal Income Tax Code.

3.5. The activity carried out by the Claimant as a collaborator of the entity with NIPC ...- B... - Professional Law Firm Limited Liability Partnership, whose income was declared in accordance with Article 119, No. 1, subparagraph b) of the Personal Income Tax Code, is classified under the activity of lawyers/legal activities.

3.6. The Claimant also issued, within the scope of his technical competencies, invoices and electronic receipts to entities whose activities are connected with the activities described as legal practice/legal consultant, namely those issued to C..., to D..., S.A., and to E..., NIPC....

3.7. Given the Form 3 Personal Income Tax return submitted by the Claimant, it was verified that the taxation of income earned within the scope of these activities is specifically provided for in Article 31, No. 1, subparagraph b) of the Personal Income Tax Code, thus, in light of the discrepancy detected by the TA, the Claimant was notified to make representations in proceedings concerning a divergence, as well as in pre-decision hearing, having exercised this right through his representative.

3.8. It was with recourse to this rule that the TA based the correction of the Claimant's income, since there were discrepancies in the qualification of the acts, facts or documents with relevance to the tax assessment.

3.9. From which it is concluded that the TA, verifying that the data the Claimant declared in Annex B of Form 3 of the Personal Income Tax return presented discrepancies in withholding and consistency with the CAE, register and declared income, initiated divergence proceedings, with the Claimant being legally notified to participate, which he did, however, the discrepancies were not resolved, which culminated in the replacement of the declaration submitted by another prepared by the TA, with the elements it possessed.

3.10. In the case sub judice, contrary to what the Claimant claims, the notification of the decision of the Head of Finance Services Porto..., in the proceedings for management of discrepancies in Personal Income Tax, determining the alteration of the income declared, was notified to his representative in accordance with the power of attorney that was sent to the TA on 27/04/2018, and in that notification it was stated that the assessment would be notified to the taxpayer by the Central Services of the TA, not constituting a personal act, wherefore there is no violation of Article 66, No. 1 of the Personal Income Tax Code, with no procedural nullity being established.

E - FACTUAL GROUNDS

1. With relevance to the assessment and decision of the questions raised, both preliminary and substantive, the following facts are established and proven:

4.1. From the analysis of the record of activity codes in the register of the Claimant's activities, the following activity codes were verified: - Code 6010 - Lawyer (main activity) and; - Code 1519 - other service providers (secondary activity) - Activity code 69101 - legal activities and code 90030 - Artistic and literary creation (secondary activities) in accordance with the Portuguese Classification of Economic Activities (CAE) of the National Institute of Statistics.

1. The Claimant submitted on 05/04/2018 the Form 3 Personal Income Tax return for the year 2017-..., in which he declared: as dependent employment income the sum of €26,120.92.

2. He further submitted Annex B to Form 3, in which he declared as self-employment income the sum of €11,250.00 relating to income from the exercise of professional activities specifically provided for in the table of Article 151 of the Personal Income Tax Code in field 403 and the sum of €14,945.61 relating to income from other service provision in field 404.

3. The Claimant issued receipt-invoices Nos. 37, 39, 40, 42, 45, 46, 47 and 48, corresponding to activity code No. 6010.

4. The Claimant entered in field 404, relating to income from other service provision with the code of activity carried out "Other service providers", corresponding to activity code No. 1519, the following invoices: No. 1000000 in the amount of €5,000.00, No. 1000001 in the amount of €5,000.00, receipt-invoice No. 38 in the amount of €250.00, receipt-invoice No. 41 in the amount of €3,800.00, receipt-invoice No. 43 in the amount of €895.61.

5. On 24/04/2018, the declaration in question was identified in the management of discrepancies for the purpose of verification of the tax fact, namely discrepancies in withholding and consistency of CAE, register and declared income, with the Respondent on 27/04/2018 providing clarifications via internet to the TA.

6. On 27/04/2018, the Claimant sent to the TA a power of attorney identifying his Representative.

7. On 21/08/2018, the TA notified the Claimant by office No...., for the exercise of pre-decision hearing, or to voluntarily proceed with corrections to the income tax return by submitting a replacement declaration.

8. On 13/09/2018, the TA received a response from the Claimant exercising his right to pre-decision hearing.

9. On 20/09/2018, the TA notified the Claimant's Representative by office No...., referring to the decision rendered with reference to discrepancy No..., concerning Personal Income Tax for 2017, in accordance with CTT registration No. RH...PT, with delivery date on 21/09/2018.

10. The TA proceeded on 19/09/2019 to the official declaration of income Form 3 Personal Income Tax, for the year 2017, with the following corrections:

14.1. Table 4-A of Annex B, removing the income from field 404 in the amount of €14,945.61 to field 403 of the same table, now appearing in field 403 of table 4-A of Annex B, the total amount of income earned in category B in the year 2017, which totals €26,195.61.

14.2. In field 601 of table 6 of Annex B, it indicated the total income subject to withholding at source in the amount of €20,945.61.

1. On 03/10/2018 Assessment No. 2018... was issued, from which resulted the said correction and the calculation of tax receivable in the amount of €583.52.

F - UNPROVEN FACTS

1. Of the facts with interest for the decision of the case, which were the subject of concrete analysis, there are no other facts with relevance to the assessment of the merits of the case that have not been proven.

G - ISSUES TO BE DECIDED

1. In light of the positions of the parties, assumed in the arguments presented, the following central issues for decision are:

a. That alleged by the Respondent:

(i) Declaration of partial illegality of the tax assessment act in respect of Personal Income Tax for 2017, No. 2018....

(ii) Condemnation to payment of compensatory interest.

J - MATTERS OF LAW

1. Thus, the central issue to be decided consists of determining whether there is partial illegality of the Personal Income Tax assessment act for 2017, No. 2018....

2. The Claimant invokes the illegality of the act, firstly by understanding that the official correction effected by the TA was notified by Office No. 2018..., only to his Representative.

3. Now, it results from the facts established that within the scope of the divergence proceedings, the Claimant, for his representation before the TA, submitted a power of attorney identifying and conferring powers of representation on a representative. Following this, the TA notified Office No..., to the said Representative, by registered mail bearing No. RH...PT.

4. In these terms, there is no doubt in this Tribunal that the Representative was duly notified. However, the taxpayer was not directly notified by the TA, and it must now be determined whether or not it is mandatory to effect notification of the office also to the taxpayer.

5. For this purpose, the duty to notify the recipient of the act, imposed by No. 3 of Article 268 of the Constitution of the Portuguese Republic, constitutes an instrument for the realization of the principle of judicial protection enshrined in the subsequent No. 4. It is thus required that the interested party be effectively informed of the act, which implies the transmission of its essential elements and the respective grounds, so that the recipient may decide on the advisability of contesting the act in court.

6. This formality constitutes a requirement for the effectiveness of the act, which results expressly from the provisions of Article 268, No. 3, first part, of the Constitution of the Portuguese Republic, and Article 77, No. 6, of the General Tax Law, and Article 36, No. 1, of the Tax Procedural Code, in accordance with which "[a]cts in tax matters that affect the rights and legitimate interests of taxpayers only produce effects in relation to them when validly notified to them."

7. Thus, the notification of an act in tax matters functions as a condition for the effectiveness of that act: a tax act is only legally effective – that is, only capable of producing the legal effects to which it tends – after it has been notified to the directly interested parties.

8. In accordance with Article 77, No. 6, of the General Tax Law, "The effectiveness of the decision depends on notification," for which reason we refer to the rules regarding notification provided for in Articles 35 and following of the Tax Procedural Code.

9. Thus, as to the rule of notification, when the taxpayer constitutes a representative, Article 40 of the Tax Procedural Code No. 1, subparagraph a), provides the following: "1 - Notifications to interested parties who have appointed a representative shall be made to the representative as follows: a) In tax proceedings, by registered mail, addressed to his office or by electronic data transmission in the respective reserved area of the Tax Portal;"

10. Now, in the present proceedings, the Claimant appointed a Representative, therefore all notifications arising from the tax proceeding are made to the person of the Representative, and in this manner, are validly effected by registered mail.

11. As previously stated, it is concluded that the notification of Office No...., relating to the decision rendered with reference to discrepancy No...., concerning Personal Income Tax for 2017, with delivery date on 21/09/2018, verified on the website https://www... was effected by registered mail with CTT registration No. RH...PT, was validly effected to the person of the representative, and produces the legal effects to which it tends, not needing to be effected also to the Taxpayer.

12. As to the question relating to the correction effected by the TA that led to the issuance of the assessment act here impugned, we have to say the following.

13. In summary, the TA considered that the income declared by the Claimant, in field 404 in the amount of €14,945.61 corresponding to invoices: No. 1000000 in the amount of €5,000.00, No. 1000001 in the amount of €5,000.00, receipt-invoice No. 38 in the amount of €250.00, receipt-invoice No. 41 in the amount of €3,800.00, receipt-invoice No. 43 in the amount of €895.61, were incorrectly classified in that field, as they concerned the Claimant's main activity of legal practice/legal consulting, and accordingly corrected and altered to field 403, both of Annex B Table 4-A, totaling €26,195.61. With the alteration the simplified regime coefficient corresponding to economic activity (0.75) would be applied.

14. The Claimant maintains, succinctly, that in accordance with Article 75, No. 1, of the General Tax Law, the declarations of taxpayers presented as provided by law are presumed to be true and in good faith, and it is the burden of the TA to demonstrate the untruthfulness of these facts, when it seeks to impose taxation on tax facts different or distinct from those declared by taxpayers, which it did not do.

15. Now, in light of the facts established as proven and the legal rules in force at the date of the facts, it becomes necessary to assess the legal matter concerning the classification of the activity under the simplified regime.

16. The Claimant issued various invoices, which he classified as his secondary activity of "Other service providers" with the corresponding activity code No. 1519.

17. The Claimant considers that the simplified regime coefficient (0.30) should be applied to invoices issued to the following entities: C..., to D..., S.A. and to E....

18. The TA, regarding the respective invoices, requested clarifications and additional information from the Claimant, and after the respective clarifications, considered that the income did not fall within the secondary activity, but rather within the main activity of legal practice (Code 6010), taking into account the content of the invoices and the entities to which the invoices were issued, thus applying the respective simplified regime coefficient (0.75).

19. Given the foregoing, let us examine the legal-tax classification of the activity carried out "Other service providers", corresponding to activity code No. 1519.

20. Thus we begin by analyzing the legal regime for the taxation of category B income, provided for in Article 3 of the Personal Income Tax Code and the choice and application of the simplified regime provided for in Articles 31 and 151 of the Personal Income Tax Code.

21. Business and professional income is considered, in accordance with Article 3, No. 1 of the Personal Income Tax Code: a) That derived from the exercise of any commercial, industrial, agricultural, forestry or livestock activity; b) That earned in the exercise, on own account, of any service provision activity, including scientific, artistic or technical activities, whatever their nature, even if connected with activities mentioned in the preceding subparagraph; c) That derived from intellectual or industrial property or from the provision of information respecting experience acquired in the industrial, commercial or scientific sector, when earned by its original holder.

22. We consider it certain that the Claimant declares as his main activity "Lawyer" (code 6010) and as secondary activity "Other Service Providers" (code 1519).

23. With respect to the activity of lawyer or legal consultant, it is to be said that when earned on own account, in the capacity of service provision activity, whether exercised in strict compliance with the rules of the legal profession, or materialized in another form of self-employment service provision, namely as legal consultant, legal consultancy, legal arbitration, legal representation, including scientific, artistic or technical activities, whatever their nature, even if connected with other activities, are classified in the Personal Income Tax Code - business and professional income, provided for in Article 3, No. 1 of the Personal Income Tax Code, as category B income.

24. In this sense, in the Classification of Portuguese Economic Activities by Activity Branch (CAE), respectively: the Main Activity: Legal activities (code 69101) comprises consultancy activities and the exercise of general mandate, in representation of natural or legal persons, generally by lawyers, before courts or other judicial entities, within the scope of civil, criminal, labor or other law, as well as advisory activities in general and preparation of various legal documents (articles of association, partnership agreements or other similar documents related to the establishment of companies, preparation of notarial documents, patents and copyrights, wills, transfers of assets, legal services related to the transfer of assets by auction, etc.). It includes activities relating to the exercise of the functions of lawyer, court officer, execution solicitor, experts and attorneys, carrying out the activity on own account or in partnership.

25. And the secondary activity declared by the Claimant (code 90030): comprises the activities of individual artists such as painters, sculptors, writers, cartoonists, composers, art engravers in chisel (includes engravers in aquatint), restoration of works of art (includes museum collection objects) and other similar individual artistic activities. It includes activities of independent journalists.

26. The activity of "Other Service Providers" (code 1519) is provided for in the table referred to in Article 151 of the Personal Income Tax Code (CIRS), in accordance with Ordinance No. 1011/2001, of 21 August.

27. In this sense the TA issued Circular No. 5/2014, from the Directorate of Services of Personal Income Tax, of 20 March 2014: "1. Income earned in the exercise, on own account, of any service provision activity that falls within subparagraph b) of No. 1 of Article 3 of the same Code is covered by subparagraph b) of No. 2 of Article 31 of the Personal Income Tax Code, regardless of whether the activity carried out is, in accordance with Article 151 of the Personal Income Tax Code, classified according to the Portuguese Classification of Economic Activities (CAE) of the National Institute of Statistics, or in accordance with the codes mentioned in the table of activities approved by Ordinance No. 1011/2001, of 21 August, including the activity with code "1519 Other service providers" since the normative in question does not refer to activities identified in a specific manner in the activity table, in contrast to what occurs in subparagraph b) of No. 1 of Article 101 of the Personal Income Tax Code for withholding at source purposes."

28. Reserving that it is the settled understanding of the case law that circulars and administrative circulars issued by the TA are binding only on the respective services and not on the taxpayer. The procedures defined, "maxime" the "circulated law" by the TA cannot derogate from the principle of tax legality (Decision of the Central Administrative Court South rendered in case No. 02312/08 of 04/23/2008).

29. However, the secondary activity "1519 Other service providers" is generic, and in conjunction with subparagraphs b) and c) of No. 1 of Article 31 of the Personal Income Tax Code encompasses all service provision.

30. If not, if the activity is not typified in the remaining activity codes, the taxpayer will necessarily have to choose the code "1519 Other service providers".

31. In choosing this code, it will always be classified under subparagraph b) of No. 1 of Article 31 of the Personal Income Tax Code.

32. Thus, the question necessarily arises, when subparagraph c) of No. 1 of Article 31 of the Personal Income Tax Code is applicable, since the code "1519 Other service providers" encompasses all other service provision not typified.

33. This Arbitral Tribunal also understands that, in the absence of a true tax concept of service provision or commercial activity, given that these are concepts whose extent in their respective branches of origin law are not exactly transposable to tax law, recourse to open lists of activities implies – as the principle of legal certainty requires – that the activities described in the tables or lists be understood broadly.

34. As can be read in the arbitral decision case No. 337/2017-T, "where there are doubts between qualifying a certain activity as commercial or service provision – and there are manifestly gray areas – the first criterion should be the classification intended by the legislator, that is, to bring it into line with the classification existing in the lists (of Article 4 or the table referred to in Article 151) even if that classification requires a broad reading of the described activities".

35. Thus, since his activity is not expressly typified in the professional activities specifically provided for in the table referred to in Article 151, and given the code "1519 Other service providers", the taxpayer will necessarily have to be permitted to identify this code as being his own.

36. However, the question arises of the burden of proof, that is, who is responsible for proving the type of activity that the taxpayer carries out.

37. It seems evident, including bearing in mind the presumption of veracity that governs the declarations of the taxpayer, that it is the burden of the Taxpayer to provide proof, since it is he who invokes it, and as such it is incumbent upon him to provide the elements that constitute his claim.

38. Let us then examine the legal-tax framework that governs the burden of proof:

55.1. Now it results from Article 74, No. 1 of the General Tax Law that: "the burden of proof of the facts constituting the rights of the tax administration or taxpayers falls on whoever invokes them," in consonance with Article 342, No. 1 of the Civil Code, "It falls to him who invokes a right to make proof of the constitutive facts of the right alleged." (our emphasis)

55.2. Furthermore, on the matter of burden of proof, there is extensive case law, sustaining that it is the burden of the TA to prove the verification of the legal prerequisites that legitimize its action and that it is the burden of the taxpayer to prove the facts that operate as the basis of the claims and rights it invokes. (see Arbitral Case No. 236/1014-T of 4 May 2015).

55.3. In this same sense, the decision of the Supreme Administrative Court of 26.2.2014, proc. No. 0951/11: "In cases where the correction of declared taxable income results from the fact that the TA has considered that certain expenses cannot be part of the acquisition value to be considered in calculating capital gains because they relate to assets that were not transferred (reason why, through the process generally called 'arithmetic corrections', it purged such expenses from the acquisition value), it is the burden of the TA to prove that the legal prerequisites that legitimize its action in the sense of correcting the taxable profit are verified (that is, to demonstrate the facts that led it to conclude that those expenses do not relate to the transferred assets), only after which it is the burden of the taxpayer to prove the existence of the facts it alleged as the basis of its right to see such amounts relieved negatively in calculating capital gains."

55.4. This decision is clarifying as to the distribution of the burden of proof, for which we refer: "It is thus necessary to answer the question – merely of law, as we have already stated, and, therefore, comprised within the scope of the powers of cognition of this Supreme Court – of knowing on whom falls the burden of proof of such fact, against whom the question of whether the said improvements were or were not transferred must be decided. (...)

Thus, it is necessary to recall, briefly and synthetically, the rules of distribution of the burden of proof: in principle, it is the burden of the TA to prove the verification of the legal (binding) prerequisites of its action, particularly if aggressive (positive and unfavorable) and, in return, it falls to the administrated person to present sufficient proof of the illegitimacy of the act, when such prerequisites are shown to be verified, a solution now established by Article 74, No. 1 ('The burden of proof of the facts constituting the rights of the tax administration or taxpayers falls on whoever invokes them'), of the General Tax Law and which at that time should already be considered applicable because it corresponds to the general rule of Article 342 of the Civil Code, under which whoever invokes a right has the burden of proving the constitutive facts, with the other party bearing the burden of proving the facts that impede, modify or extinguish it.

But it is not always thus. The burden of proof will vary depending on the type of administrative act in question, and the matter of its apportionment must be decided "in accordance with the position that the parties occupy in the proceedings and with the type of legal relationship that constitutes its object and, consequently, in the field of litigation for annulment, with the type of annulled act, as the law characterizes or defines its constituent elements" (See, among all, the following decision of the Litigation on Tax Matters Section of the Supreme Administrative Court:

– of 17 April 2002, rendered in the case with No. 26.635, published in the Appendix to the Official Journal of 8 March 2004. (...) To proceed with the correction of declarations (and consequent additional assessment of the tax considered to be missing), the TA, particularly when it understands that declared costs or revenues have been stated that do not correspond to reality (those because non-existent or higher than actual, these because lower than actual), must substantiate its formal and substantive judgment, and judicial review may extend to both aspects of the substantiation (the formal and the material). (...) Thus, in the case of the proceedings, we can advance the following conclusions, in accordance with case law long established in tax courts: because the additional assessment of corporate income tax is based on the non-recognition by the TA of a portion of the acquisition value (that relating to the expenses declared with the carrying out of improvements), it is the burden of the TA to prove that the legal prerequisites that legitimize its action are verified, that is, to demonstrate the existence of serious indications that the transfer of improvements whose value is part of the acquisition value did not occur; once such proof is provided, it falls on the Taxpayer the burden of proving the existence of such transfer, which it alleged as the basis of its right to see such costs relieved negatively in calculating capital gains and, consequently, in its taxable income; in this case, it will not be sufficient for the Taxpayer to create doubt about its truthfulness, even if well-founded, since in this case Article 121 of the Tax Code does not apply; in fact, the burden established in that legal provision against the TA (that doubt regarding the existence and quantification of the tax fact must be decided against the TA: in dubio contra Fisco) only exists when it is the TA that is asserting the existence of tax facts and their respective quantification and not when, as in the present case, it is the Taxpayer who must demonstrate the existence of the facts on which it bases its right to see certain costs relieved negatively in calculating capital gains and, consequently, its taxable profit. Hence we have said that it is sufficient for the TA to demonstrate the verification of the "fact-indices" (objective and credible indications) which, combined with each other and appreciated in light of the rules of experience, allowed it to conclude that the transfer in question did not occur. If it does so, the administrative decision to disregard the expenses in question as part of the acquisition value to be used in calculating capital gains will be materially substantiated and, consequently, the presumption of truthfulness of the records, established at that time in Article 78 of the Tax Code, will be overcome. It is this same article that states that the presumption established therein may be set aside, in particular, by the verification of "other well-founded indications that it does not reflect the actual taxable income of the taxpayer" (That is, even though we are dealing with a legal presumption, for it to be overcome it is not necessary to have contrary proof – unlike what is generally required regarding such presumptions (see Article 350, No. 2, of the Civil Code), since Article 78, at the end, of the Tax Code establishes, with special character, a different regime for overcoming the presumption)."

55.5. The decision concludes in the sense: "In cases where the correction of declared taxable income results from the fact that the TA has considered that certain expenses cannot be part of the acquisition value to be considered in calculating capital gains because they relate to assets that were not transferred (reason why, through the process generally called 'arithmetic corrections', it purged such expenses from the acquisition value), it is the burden of the TA to prove that the legal prerequisites that legitimize its action in the sense of correcting the taxable profit are verified (that is, to demonstrate the facts that led it to conclude that those expenses do not relate to the transferred assets), only after which it is the burden of the taxpayer to prove the existence of the facts it alleged as the basis of its right to see such amounts relieved negatively in calculating capital gains. It is sufficient for the TA to demonstrate the verification of the 'fact-indices' (objective and credible indications) which, combined with each other and appreciated in light of the rules of experience, allowed it to conclude that the assets to which the expenses in question relate were not transferred and, therefore, that the administrative decision to disregard those expenses in calculating capital gains is materially substantiated and to overcome the presumption of truthfulness of the records (as provided at that time in Article 78 of the Tax Code). Once such demonstration is made, it then falls on the taxpayer to demonstrate that such assets were actually transferred, with it not being sufficient to create doubt on this matter (Article 121 of the Tax Code does not find application here) since it is not the TA that is asserting the existence of a tax fact not declared or assigning to a tax fact a dimension different from that declared, in which case the doubt would have to be decided against it, but rather it is the taxpayer that invokes its right to see expenses relieved negatively in calculating capital gains that it says relate to transferred assets, for which reason doubt on this matter is against it."

1. Still within the scope of what has already been decided, but of relevance to the grounds of the present arbitral decision, see the Arbitral Decision, Case 236/1014-T of 4 May 2015: "As a consequence, it falls on the Tax Administration the burden of proving the verification of the legal (binding) prerequisites legitimizing its action, for which it must prove the constitutive facts on which the administrative-tax decision legally depends with certain content and with a certain meaning. For its part, it falls on the taxpayer to prove the facts that operate as the basis of the claims and rights it invokes.." (...) "As such, in accordance with the provisions of No. 1 of Article 74 of the General Tax Law, it falls on the Respondent to demonstrate the bases and factual situations on which are based the adjustments, disallowances and regularizations that, by it, were promoted and whose relevance and tax consistency it asserts, with the burden thus falling on the Respondent of clarifying, substantiating and documenting the operations in question and their justification.". (our bold)

(...) In this sequence, it should further be noted that it results from Article 75, No. 1 of the General Tax Law that the declarations of taxpayers, presented as provided by law, as well as the data and calculations recorded in their accounts or records, when these are organized in accordance with commercial and tax legislation, are presumed to be true. However, this presumption ceases in particular if such declarations, accounts or records, or their supporting data, present omissions, errors and inaccuracies or there are collected well-founded indications that they do not reflect or prevent knowledge of the actual taxable income of the taxpayer (Article 75, No. 2, subparagraph a) of the General Tax Law). It should be recalled again that, in accordance with No. 3 of Article 75 of the General Tax Law, "[t]he evidentiary value of taxpayers' computer data depends, except as provided in special legislation, on the provision of documentation relating to their analysis, programming and execution and the possibility for the tax administration to verify them". (...) Now, whenever subparagraph a) of No. 2 of Article 75 of the General Tax Law applies, "it will fall on the taxpayer the burden of proving the facts declared or recorded in his accounts or records as to which there are probative doubts", so that "the doubts that in judicial proceedings remain on factual matters cannot be considered doubts founded" for the purposes of No. 1 of Article 100 of the Tax Procedural Code (see thus Jorge Lopes de Sousa, Personal Income Tax Code annotated and commented, vol. II, 6th ed, 2011, p. 133).

Hence the burden falls on the Respondent of effective demonstration of the recorded facts and of the reasons underlying the adjustments made to the accounts, with it being insufficient to leave doubt about the viability of the respective justification, since the provision of No. 1 of Article 110 of the Tax Procedural Code has its fundamental application when it is the Tax Administration that is asserting the existence of tax facts and their respective quantification (see thus the decision of the Supreme Administrative Court of 26.2.2014, proc. No. 0951/11). In this manner, the evidence produced must ensure, with the required degree of certainty, that the regularizations and adjustments made possess sufficient consistency and materiality in light of the justifications that underpin them."

1. We now turn to the legislation in force, which tells us that the presumption of veracity and good faith applies to the Claimant's declarations, a fundamental principle established in Article 75 of the General Tax Law: "The declarations of taxpayers presented as provided by law, as well as the data and calculations recorded in their accounts or records, when these are organized in accordance with commercial and tax legislation, are presumed to be true and in good faith, without prejudice to other requirements on which the deductibility of expenses depends. (Amended by Law No. 80-C/2013 of 31 December)".

2. However, it provides for the removal of the presumption when: "the declarations, accounts or records reveal omissions (Article 75, No. 2, subparagraph a) and when the taxpayer does not comply with the duties incumbent upon him to clarify his tax situation (Article 75, No. 2, subparagraph b).

3. This duty of clarification acquires special relevance, with regard to clarifications, information provided informatically, as established in Article 75, No. 3 of the General Tax Law: "The evidentiary value of taxpayers' computer data depends, except as provided in special legislation, on the provision of documentation relating to their analysis, programming and execution and the possibility for the tax administration to verify them," information that will necessarily have to be demonstrated by the taxpayer.

4. Should there be doubts as to the type of income being reported in the information transmitted to the Tax and Customs Authority, it is the duty of the TA, in accordance with the principle of investigation provided for in Article 58 of the General Tax Law, to carry out all necessary steps to satisfy the public interest and discover the material truth, including ascertaining the type of income declared in the respective declaration and it falls on the taxpayer the duty of cooperation in accordance with Article 59 of the General Tax Law.

5. Indeed, the burden falls on the Claimant of proving the verification of the legal (binding) prerequisites legitimizing his action, that is, it is incumbent upon him to prove the fact invoked by him, specifically, to prove the service provision developed by him.

6. In light of the legal regime outlined, applying it to the case at hand, we consider it certain that the burden of proof regarding the facts recorded in his income tax return for the year 2017 falls on the Claimant, that is, it is incumbent upon him to prove the income and that the respective invoices issued correspond to services provided that fall within the activity indicated by the Claimant. Corroboration always necessary, regardless of the type of service provided, its code or Classification.

7. Consequently, in harmony with the provisions of No. 1 of Article 74 of the General Tax Law, it falls on the Claimant the burden of clarifying, substantiating and documenting the operations in question, including demonstrating and justifying their relevance and tax consistency, using means of documentary proof and if necessary supplementing with testimonial proof the factual elements that support its correction, since it was promoted by the Claimant.

8. In this manner, the Claimant invokes that the invoices: No. 1000000 in the amount of €5,000.00, No. 1000001 in the amount of €5,000.00, receipt-invoice No. 38 in the amount of €250.00, receipt-invoice No. 41 in the amount of €3,800.00, receipt-invoice No. 43 in the amount of €895.61, concern other services that do not fall within the activity typified in Article 151 of the Personal Income Tax Code, without having specified or demonstrated what type of service provision was carried out.

9. In accordance with Article 75, No. 1 and No. 2, subparagraph b) of the General Tax Law, it is incumbent on the Claimant to demonstrate what services those invoices concern under activity code No. 1519 (Other service providers), since it is the Claimant that invokes in his invoices and income tax return that those services fall within that activity.

10. The Claimant merely listed invoices and did not bring to the record the service provision contract, necessary to evaluate the content and nature of the contract underlying the invoices, so as to be able to determine in concrete the implicit service provision, in order to enable its correct tax classification in the economic activity and in the applicable simplified regime, in accordance with the provisions in the subparagraphs of No. 1 of Article 31 of the Personal Income Tax Code.

11. The invoices do not replace the contract and Article 1154 of the Civil Code establishes the notion of service provision contract, as that in which one of the parties obliges himself to provide the other with a certain result of his intellectual or manual work, with or without compensation.

12. Now the Claimant did not attach a contract nor was any proof attached, in particular testimonial, that would permit ascertaining and assessing the content and nature of the service provision contract that would underlie the invoices.

13. We consider it certain that the Claimant provided services to the entities: C..., D..., S.A. and E..., however he did not attach a supporting document or provide testimonial proof that proves the type of service provision carried out for those entities, nor did he prove that the service provision did not fall within his main activity.

14. Although the Claimant understands that the invoices concern other service providers and as such do not fall within the activities provided for in Article 151 and in subparagraph b) of Article 31, No. 1 of the Personal Income Tax Code, but rather fall within subparagraph c) of Article 31, No. 1 of the Personal Income Tax Code, whose coefficient is 0.35%, it was incumbent upon him to clarify, substantiate and document the operations declared by him, in order to insert them into subparagraph c) of Article 31, No. 1 of the Personal Income Tax Code.

15. In conclusion, the determination of taxable income is obtained through the application of the coefficient provided for in Article 31, No. 1, subparagraph b) of the Personal Income Tax Code, that is 0.75 to income from professional activities specifically provided for in the table referred to in Article 151, and as was demonstrated the activity with code 1519 is included in the said table of Ordinance No. 1011/2001, of 21 August.

16. Now, from the analysis of the probative material in the present proceedings, it results that the TA, based on the elements it had, relating to the main and secondary activity that the Respondent carried out and the entities to which the invoices were issued, namely to C..., D..., S.A. and E..., all classified with code 1519, to which corresponds an activity expressly provided for in the table of Ordinance No. 1011/2001, of 21 August, includes it in Article 31, No. 1, subparagraph b) of the Personal Income Tax Code.

17. The TA did not have sufficient elements to proceed with the correction and alteration to field 403, both of Annex B Table 4-A.

18. And the Tribunal also does not have such demonstrative elements, as previously stated, for which reason it decides for the inadmissibility of the request for declaration of illegality of the tax assessment act in respect of Personal Income Tax for the year 2017.

19. The Arbitral Tribunal, under Articles 608, No. 2, 663, No. 2 and 679 of the Civil Procedure Code by application of Article 29 of the Arbitral Tribunal Regulations, is not obliged to assess all arguments alleged by the Claimant or by the Respondent, when the decision is prejudiced by the solution already rendered, as is the case in the present proceedings, for which reason the remaining questions submitted for a ruling are prejudiced.

L - DECISION

Therefore, in view of all the foregoing, the present Arbitral Tribunal decides:

To adjudge the request for declaration of illegality of the tax assessment act in respect of Personal Income Tax for 2017, No. 2018..., in the partial amount of €7,955.08 (seven thousand nine hundred and fifty-five euros and eight cents), inadmissible.

The value of the proceedings is fixed at €7,955.08, the assessment value being the economic value of the proceedings as measured by the amount of the disputed assessment, and in accordance therewith the costs are fixed in the respective amount of €612.00 (six hundred and twelve euros), to be borne by the Claimant in accordance with Article 12, No. 2 of the Tax Arbitration Regulations, Article 4 of the Tax Procedure Regulations and Table I appended thereto. – No. 10 of Article 35, and Nos. 1, 4 and 5 of Article 43 of the General Tax Law, Articles 5, No. 1, subparagraph a) of the Tax Procedure Regulations, 97-A, No. 1, subparagraph a) of the Tax Procedural Code and 559 of the Civil Procedure Code).

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Lisbon, 31 May 2019

The Arbitrator

Dr. Paulo Ferreira Alves