Summary
Full Decision
ARBITRAL DECISION
1. REPORT
On 20 March 2017, A… and B…, married to each other, Taxpayers nos. … and …, respectively, filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of articles 95 of the General Tax Law (LGT), 99 paragraph a) of the Tax Procedure and Process Code (CPPT), 140 of the Income Tax Code for Individuals (CIRS) and 10 no. 1 paragraph a) of Decree-Law no. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter, for brevity, designated RJAT), in which they requested the declaration of illegality and consequent annulment of the tax act of additional assessment of Income Tax on Individuals (IRS) and compensatory interest no. 2016…, for reference to the year 2012, in the amount of € 40,970.00 (€ 36,017.34 as tax and € 4,953.10 as compensatory interest).
The Requesters further seek the restitution of the entire tax paid plus compensatory interest, pursuant to article 100 of the LGT.
And, to the extent that the requests mentioned in paragraphs 2 and 3 are successful, they seek recognition of the error attributable to the services of the Tax Administration (AT), with the consequent condemnation to the payment of compensatory interest calculated on the amount of € 40,970.44, as well as the payment of the costs of the arbitral proceedings.
The Requesters did not proceed to appoint an arbitrator, whereby, pursuant to paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of the RJAT, the President of the CAAD Ethics Council designated the undersigned as arbitrator, who communicated acceptance of the appointment within the applicable period.
The parties were notified of this designation and did not manifest any intention to refuse it.
In accordance with the provision in paragraph c) of no. 1 of article 11 of the RJAT, the Arbitral Tribunal was constituted on 30-05-2017.
On 05-07-2017, the Tax Authority, hereinafter designated as Respondent or AT, duly notified for that purpose, submitted its response, defended itself through objection, refuting the arguments raised by the Requesters, and filed the Administrative Process (PA) and a document with the case.
Given that, in this case, none of the purposes legally assigned to it were verified, pursuant to the provisions of articles 16 c) and 29 no. 2 of the RJAT, as well as the principles of procedural economy and the prohibition of useless acts, on 10-07-2017 the holding of the meeting referred to in article 18 of the RJAT was dispensed with.
Notified to submit written arguments, if they so wished, successively, within a period of 10 days, with the AT's period commencing from notification of the Requesters' arguments, the Parties did so while maintaining their initial positions.
In the arguments presented on 06-09-2017, additionally, the Requesters invoked that the AT, with the filing of a document in its Response, which does not appear in the administrative file, to support a tax act, is making use of successive or ex post facto reasoning, legally inadmissible.
Notified of the Requesters' arguments on 06-09-2017, the AT filed its arguments with the arbitral proceedings on 20-09-2017, refuting the existence of the alleged ex post facto substantiation defect, not only because the document does not include information capable of altering the applicable legal provisions, nor the qualification or quantification of the taxable fact, but also because, in arbitral tax litigation, the Response is equivalent to the defence of Judicial Objection and, to that extent, the AT may offer additional evidence.
The Respondent further argues that the Requesters took advantage of the arguments to introduce innovative argumentation in the case, which relates to the lack of substantiation of the tax act, and this should be disregarded because it was not timely invoked.
On 25-09-2017 the Requesters came to request the withdrawal of the AT's arguments on the grounds of their untimely presentation, invoking, to that effect, that pursuant to the provision in no. 7 of article 39 of the CPPT, 138 no. 1 and 2 of the Code of Civil Procedure (CPC), applicable ex vi article 3 A no. 2 of the RJAT, notifications made by internet are presumed to be made on the date of emission, with the extract of the message made by the official serving as proof, which will be included in the case.
The Requesters conclude that, the Respondent having 10 days counted from notification of their arguments, such period had ended on 18 September 2017, and consequently they request the withdrawal of the Requesters' arguments.
In the request alluded to in the preceding paragraph, they dispute having invoked new arguments in the arguments stage, and allege that they merely limited themselves to responding to a new fact brought by the AT to the case, arising from the filing of a document with the Response.
Pursuant to the principle of contradiction, the Tribunal notified the AT to pronounce itself, if it wished, on the request for withdrawal.
The AT pronounced itself invoking that notifications made through the CAAD electronic platform are subject, ex vi article 29 no. 1 paragraph e) of the RJAT and the provision of article 248 of the Code of Civil Procedure (CPC), where it is provided that electronic notification is presumed to be made on the 3rd day following the date of preparation or on the first business day following that, when not.
Whereby, the 10-day period that the AT had to submit the arguments commenced on 12-09-2017 and ended on 21-09-2017, whereby the arguments, sent to the CAAD on 20-09-2017, were sent one day before the end of the period.
In due time, the Tribunal, with a view to discovering material truth, notified the AT to file with the case a partial extract of the computer file received from the Tax Authorities of Switzerland where the following appear: (i) the income earned in the year 2012 by the Requesters; (ii) The identification (identity) of the Requesters; (iii) The banks and/or the financial institutions paying such income; (iv) the nature of such income; and (iv) the respective numbers of the bank accounts.
On 13-10-2017 the AT filed with the case a "print screen" of an excel sheet, with the elements contained in document no. 1 filed with the Response.
On 16-10-2017 the Arbitral Tribunal issued an order by which it notified the Requesters to pronounce themselves, if they wished, on the document filed by the AT and extended the period for the issuance of the arbitral decision by a period of 30 (thirty) days, pursuant to article 21 no. 2 of the RJAT.
On 16-10-2017 the Requesters pronounced themselves, pursuant to the principle of contradiction, on the document filed.
Notified of the order of the Arbitral Tribunal, the Requesters came, by request of 17-10-2017, to reiterate the content of the request submitted on 16-10-2017.
2. Subject Matter of the Case
2.1 Position of the Requesters
The Requesters allege, in summary, the following:
That they earned interest from a foreign source paid through C…, S.A, in the amount of € 18,318.93, and through D…, in the amount of € 37,516.79, having submitted their IRS declaration on 31 May 2013 and declared these income items in Annex J (income earned abroad), classified as capital gains or gains from the alienation of securities, entirely attributed to the male Requester;
Following contact from the AT Services on 25 February 2015, the Requesters submitted a replacement declaration, in which they proceeded to allocate the income to both Requesters and to the classification of the income as "income under the Savings Directive no. 2003/48/EC";
Subsequently, following an audit action on income obtained abroad falling within the scope of Council Directive no. 2003/48/EC, of 3 June 2003 ("Savings Directive"), the AT proceeded to the ex officio correction of the income declaration Model 3, with the inclusion of interest income, allegedly earned by the Requesters, in table 4 of Annex J of the income declaration, adding to the interest income earned abroad the amount of € 144,372.44;
In the prior hearing they reiterated the correction of the income declaration submitted; they emphasized that the draft decision for amendment was not properly substantiated, challenged the information provided by the Swiss Tax Authorities;
The additional IRS assessment no. 2016… is illegal due to insufficient investigative activity by the Tax Administration which constitutes a defect of form through omission of an essential formality, voidable under article 163 of the Administrative Procedure Code (CPA), anchored on the following grounds:
d.1. the AT did not rebut the presumption of truthfulness of the Taxpayers' declarations, as it did not demonstrate, by any legally admissible means of evidence, the verification of the tax fact nor undermined the content of the Taxpayers' IRS declaration;
d.2. The AT violated the principle of inquiry inasmuch as it did not seek to attest to the materiality of the information received from the Swiss Tax Administration;
d.3 The information provided by the Swiss Tax Administration is not substantiated, whereby it lacks probative force, pursuant to article 76 nos. 1 and 4 of the LGT.
e) The filing of a document produced unilaterally by the AT with the Response, which is neither prior nor contemporaneous to the tax assessment act, since it does not even appear in the administrative file, constitutes successive or ex post facto substantiation, and not only should be disregarded by the Tribunal but taints the assessment with illegality.
2.2. Position of the Respondent
In response to the Requester's request the AT defended itself through objection:
The Directorate General of International Relations Services (hereinafter DSRI) received information from the Swiss Tax Authorities, pursuant to the Savings Directive (Directive 2003/48/EC of the Council, of 3 July 2003) having identified the Requesters herein as taxable subjects who did not declare savings income in the form of interest relating to 2012;
The AT notified the Requesters to exercise the right of prior hearing on the draft amendments to the 2012 IRS declaration, communicating that these were interest income earned in Switzerland, in the amount of € 90,944.33 each, of which only € 18,757.99 had been declared, whereby, having not been declared € 144,372.68, the AT would proceed to its inclusion in table 4 of Annex J of Model 3 IRS declaration;
The notification further states that the Requesters should exhibit the certificate issued by the Tax Authorities of the country where tax was paid if the savings interest had been subject to withholding at source, so that the respective tax could be considered as a tax credit;
Having the Taxpayers not filed any document issued by the Swiss Tax Authorities, or any other document proving income obtained in that country, and the information provided by the Swiss Tax Authorities having the force of full means of proof, the presumption of truthfulness of the Taxpayers' declarations ceases and the burden of proof to the contrary falls on them;
The Taxpayers did not comply with the duty of reciprocal cooperation inherent in article 59 no. 4 of the LGT, nor the duty to substantiate the elements of the income declarations arising from article 128 of the CIRS;
The AT may file documents with the arguments not constituting, such filing, any type of ex post facto substantiation, particularly because the aforementioned document does not include information capable of altering applicable legal provisions, nor the qualification and quantification of the tax facts that were considered within the scope of the draft final decision and subsequent assessment.
3. Dismissal of Preliminary Issues
Invoked the untimely presentation of Arguments by the AT, it is necessary to assess the same previously.
The Requesters maintain that, by application of article 39 no. 7 of the CPPT, notification made via internet is presumed to have been made on the date of emission, with the extract of the message made by the official serving as proof, which will be included in the case.
Whereby, the Respondent having been notified on 6 September 2017 of the Requesters' arguments, had the period of 10 days, counted from such date, to submit their arguments, which period would have ended on 18 September 2017.
For which reason, the Respondent having submitted their arguments on 20 September 2017, the same were untimely and this should determine their withdrawal.
However, the Requesters do not have reason.
As stated by the Respondent, it is a consolidated doctrinal and jurisprudential understanding, equally supported by this Tribunal, that "the notification regime regulated in article 39 of the CPPT does not have application in tax proceedings, but rather in tax procedure (See Jorge Lopes de Sousa, Tax Procedure and Process Code, annotated and commented, 6th ed., 2011, I Vol., p. 382.) and thus the notification regime of the CPC must be applied, whereby, pursuant to the provision in article 248 of the CPC (current), notification is presumed to be made on the 3rd day following the preparation of the notification or on the first business day following."[1]
Thus, considering that the notification was entered into the system on 06-09-2017, accounting for the 3-day extension, the AT is considered notified on 11-09-2017, a Monday, first business day following the date of preparation of the notification, whereby, the 10-day period that the AT had to submit the arguments ended on 21-09-2017.
Whereby it is concluded that, having the AT sent the arguments on 20-09-2017, the same were received one day before the end of the period.
For its part, the AT invokes that the Requesters presented new arguments with the Arguments, which should be disregarded, inasmuch as all questions of fact and law must be the subject of the request for arbitral pronouncement, and their subsequent invocation is inadmissible.
In this regard, the Requesters further allege that in their arguments they merely refute what they consider to be ex post facto substantiation by the AT, which does not constitute any new argumentation.
Let us see.
In effect, with the response the AT filed as document no. 1, a table elaborated unilaterally, allegedly, on the basis of information provided by the Swiss Tax Authorities.
The AT maintains, for this purpose, that containing such a file information relating to several taxpayers is subject to tax secrecy, for which reason it could not send it to the Requesters.
Now, with due respect, not appearing such table in the PA, nor in any notification or official document, the Requesters have the right to pronounce themselves on the same pursuant to the principle of contradiction, inherent in article 16 of the RJAT, having opted to do so in the Arguments stage and thus avoiding the practice of one more procedural act.
In this regard, Councillor Lopes de Sousa maintains that: "In arguments, as a rule, only critical appreciation of the evidence and discussion of legal questions raised in the petition of objection are admissible, it not being possible to use them to invoke new facts or raise new questions of illegality of the impugned act.
This understanding has been sustained in the principle of stability of the instance (article 268 of the CPC, and in the burden imposed on the objector to set out in the petition of objection the facts and legal reasons that support the request (no. 1 of article 108 of this Code)."[2]
Whereby, given the above, the Tribunal understands that the Requesters exercised the right to contradiction and critical appreciation of the document filed by the AT with the Response, the AT not having reason.
A different question is whether such arguments are admissible and accepted by the Tribunal, a matter on which we will pronounce at the appropriate time.
There are no other preliminary issues that prevent knowledge of the merits of the action of which it is necessary to know.
The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to articles 2 no. 1 paragraph a), 5 and 6 no. 1 of the RJAT.
The case is proper.
The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to articles 4 and 10 of the RJAT and article 1 of Ordinance no. 112-A/2011 of 22 March.
Having considered everything above, it is necessary to decide:
4. Decision
4.1 Factual Matters
4.1.a. Facts Established as Proven
With relevance to the substantive decision, the Tribunal considers the following facts to be proven:
On 31 May 2013, the Requesters submitted their Model 3 IRS Income Declaration for the year 2012, having declared in Annex J the earning of income abroad in the amount of € 37,515.98, classified as "capital gains or gains from the alienation of securities" entirely attributed to the male Requester, which gave rise to the IRS assessment no. 2013…, of 20 July 2013, in the total amount of € 29,765.34 (cf. documents nos. 2 to 5 filed with the Arbitral Request, not challenged by the AT);
On 25 February 2015, the Requesters submitted a Model 3 IRS Income Declaration in replacement relating to the year 2012, in which they proceeded to alter the data in Annex J in order to (i) allocate the income earned to both Requesters, attributing to each one half of the total value, in the amount of EUR 18,757.99 and (ii) classify the income as "income under the Savings Directive no. 2003/48/EC" (cf. document no. 6 filed with the Arbitral Request);
Which gave rise to the IRS assessment no. 2015…, in the amount of € 29,202.61 and the account reconciliation statement no. 2015…, of 24 March 2015, from which resulted a balance to be refunded in the amount of € 562.73 (cf. document no. 7 filed with the Arbitral Request);
Following an audit action on income obtained abroad falling within the scope of Council Directive no. 2003/48/EC, of 3 June 2003 ("Savings Directive") on 14 October 2016, the Requesters were notified to exercise their right of prior hearing, through official letter no.…, of 11 October 2016, from the Finance Directorate of Lisbon, which contained the following:
"(…) According to the information that was transmitted to us/ pursuant to that Directive (Savings Directive), by the State/Country/territory of Switzerland, in the year 2012 the taxable subject A earned interest income in the amount of € 90,944.33, and taxable subject B received the same type of income in the amount of € 90,944.33, which were not indicated in the Model 3 IRS declaration, whereby the same will be included in table 4 of the annexes J of the said income declaration.
Given the above we inform Your Excellency that, if until the deadline indicated in the notification (15 days) you do not proceed to submit a replacement declaration, a correction assessment will be made correcting the existing anomalies (…)" (cf. PA, document no. 8 filed with the Arbitral Request)
The aforementioned notification further stated the following: "(…) We further inform you that whenever savings interest obtained abroad has been subject to withholding at source, and so that the respective tax can be considered as a tax credit in the assessment in Portugal, you should exhibit a certificate issued by the Tax Authorities of the country where tax was paid, under penalty of that amount not being considered in the assessment." (cf. PA and document no. 8)
On 28 October 2016, in response to the said official letter in the prior hearing stage, the Requesters requested the alteration of the notified draft, in the sense that there would be no place for any alteration to the Model 3 IRS Income Declaration submitted, having argued as follows:
a. They reiterated the correction of the income declaration submitted by themselves;
b. They emphasized that the draft decision for amendments was not sufficiently substantiated, which as such prevented adequate challenge of the income to which it relates, and did not justify any correction to the declaration submitted; and
c. They stated that the financial information provided pursuant to the Savings Directive was not suitable to serve as a basis for any additional IRS assessment, given its general character, naturally out of step with the pertinent rules of incidence proper to the Portuguese tax system (cf. document no. 9 filed as Arbitral Request and document filed by the AT at the request of the Tribunal);
By official letter no.…, of 18 November 2016, the Requesters were notified
of the favorable order issued on Information no. 2232/2016, pursuant to which the Finance Directorate of Lisbon proceeded to the ex officio correction of the Model 3 IRS Income Declaration in question, adding to the interest income earned abroad the amount of € 144,372.68 – (cf. PA and document no. 2 filed with the case by the Requesters)
Between 28 November and 5 December 2016, the Requesters were notified:
Of the additional IRS assessment no. 2016…, of 17 November 2016, in the total amount of € 71,901.44;
Of the statement of compensatory interest assessments nos. 2016… and 2016…, of 21 November 2016, in the total amount of EUR 4,953.10, and
Of the account reconciliation statement no. 2016…, of 21 November 2016, from which results that the total amount of € 40,970.44 is due, corresponding to the amount of € 36,017.34 to tax and € 4,953.10 to compensatory interest (cf. PA and documents nos. 1, 11 and 12 filed with the Arbitral Request)
The Requesters proceeded to the voluntary payment of the amount of € 40,970.44 on 22 December 2016 (cf. document no. 13 filed with Arbitral Request)
4.1.b. Facts Established as Not Proven
With relevance to the decision, there are no facts that should be considered as not proven.
4.2. Substantiation of Factual Matters Proven and Not Proven
Regarding the factual matters the Tribunal does not have to pronounce on everything alleged by the parties; rather it is its duty to select the facts that matter for the decision and discriminate the proven from the unproven matter (cf. art. 123 no. 2, of the CPPT and article 607 no. 3 of the CPC, applicable ex vi article 29 no. 1, paragraphs a) and e), of the RJAT).
In this manner, the pertinent facts for the judgment of the case are chosen and selected based on their legal relevance, which is established in consideration of the various plausible solutions of the question(s) of Law (cf. former article 511 no. 1, of the CPC, corresponding to current article 596, applicable ex vi article 29 no. 1 paragraph e), of the RJAT).
Thus, taking into account the positions assumed by the parties and the documentary evidence filed with the case, the facts listed above were considered to be proven, with relevance to the decision, and were moreover not contested by the parties.
5. Question to Be Decided
The question to be assessed in the present case consists of determining whether the additional IRS assessment, sustained by information from the Swiss Tax Authorities, is affected by illegality on the grounds of violation of the principle of inquiry (article 58 of the LGT), due to insufficient investigative activity by the Tax Administration, which constitutes a defect of form through omission of an essential formality, voidable by virtue of article 163 of the CPA.
And, in the affirmative, whether such illegality determines the annulment of the corresponding compensatory interest, as well as the refund of the tax amount paid by the Requesters.
Finally, and to the extent that the prior requests are successful, whether recognition is made of the error attributable to the services and, consequently, the AT is condemned to the payment of compensatory interest calculated on the amount of € 40,970.44.
6. Law
Before assessing the merits of the case and the question to be decided, it is necessary to delimit, with precision, its subject matter, bearing in mind that, in accordance with the principle of stability of the instance (enshrined in article 260 of the CPC, applicable to the case by reference from articles 28 no. 1 paragraph a) of the RJAT and article 2 paragraph e) of the CPPT), after the service of process on the defendant "the instance must remain the same as to the persons, the request and the cause of action, except for the possibilities of modification provided for by law".
And we invoke this principle in this phase of delimitation of the subject matter of the action, inasmuch as it is evident the development given by the Requesters to their claim in the arguments stage, regarding the omission of the duty of substantiation and prohibition of ex post facto substantiation, by comparison with the Arbitral Request.
Now, if it is true that the presentation of arguments constitutes a right of the party, the truth is that this articulation has a specific function that does not admit the invocation of new facts or the raising of new defects of the impugned act.
Thus, pursuant to article 108 no. 1 of the CPPT, applicable ex vi no. 1 paragraph a), of article 29 of the RJAT, with the appropriate adaptations, "in the initial petition", the objector must set out the facts and legal reasons that substantiate their request, and in the arguments to be presented at the close of evidence production, pursuant to article 120 of the CPPT, the parties should critically assess the factual matter and discuss the controversial legal questions.[3]
Having reached here, it is therefore necessary, by reference to the content of the Arbitral Request, to identify the questions to be decided, that is, the defects imputed to the IRS assessment identified above.
And the only defect invoked in the Arbitral Request is subsumed under the violation of the principle of inquiry, due to insufficient investigative activity by the AT, constituting a defect of form, through omission of an essential formality, which requires the annulment of the act under article 163 of the CPA.
And with this delimitation we exclude from the scope of knowledge of this case the questions relating to the absence of substantiation of the tax act and its ex post facto substantiation.
It is further necessary to establish the order of knowledge of the defects pointed out in the impugned tax acts.
Article 124 of the CPPT, applicable ex vi article 29 no. 1 paragraph a), of the RJAT, provides as follows:
Article 124
Order of knowledge of defects in the judgment
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In the judgment, the court shall assess priority the defects that lead to the declaration of non-existence or voidness of the impugned act and, subsequently, the defects alleged that lead to its annulment.
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In the said groups the assessment of defects is made in the following order:
a) In the first group, those defects whose verification determines, according to the prudent criterion of the judge, more stable or effective protection of the offended interests;
b) In the second group, the order indicated by the objector, provided that he establishes between them a relation of subsidiarity and no other defects are alleged by the Public Ministry or, in other cases, that fixed in the previous paragraph.
This legal provision establishes a priority for knowledge of the defects whose verification determines, according to the prudent criterion of the judge, more stable or effective protection of the offended interests.
For a correct understanding of this subject, it seems opportune to cite, as quite enlightening, the judgment of the Supreme Administrative Court, issued on 17.11.2010, in case no. 01051/09, available at www.dgsi.pt, in which it states the following:
«…the case-law of this Supreme Court has repeatedly explained, within the scope of the interpretation of the normative content of the analogous rule contained in article 57 of the LPTA, that although more effective protection of the interests of the appellant imposes, in principle, the priority knowledge of substantial or substantive defects in relation to formal defects, namely the defect of lack of substantiation (given that verification of this does not prevent renewal of the act with the same legal configuration, naturally purged of the defect that led to the annulment) – cf., among others, the judgment of the 1st Section of the STA, issued on 23.04.97, in case no. 35.367 –, such rule is not, however, absolute, as it may happen that only the substantiation may reveal substantive defects by clarifying the factual and legal framework on which the impugned act was based. That is, it may be justified to give precedence to the formal defect when the inquiry into the concrete motivation of the act proves indispensable to the control of substantive defects. For which reason it has been recognized that more effective protection of the appellant's interests may pass through the priority knowledge of formal defects, specifically of the defect of lack of substantiation, whenever discovery of the motivation of the act may offer elements necessary to the judgment of verification of substantive defects, which occurs whenever there is an absolute lack of substantiation (of fact and/or of law), because it implies the impossibility of knowledge of the facts on which the act was based and/or its legal framework, preventing jurisdictional control of substantive defects – cf., among others, the judgments issued by the 1st Section of the STA on 08.07.1993, in case no. 31.138, on 22.09.1994, in case no. 32.702, and on 20.05.1997, in case no. 40.433.(…)»
In truth, the Supreme Administrative Court (STA) has recognized that exceptions must be made to the rule on knowledge of defects, particularly when formal defects compromise the assessment of the legality of the act.
Reverting to the case at hand, it appears to us unequivocal that the defects invoked by the Requesters are only capable of determining the annulment of the tax act, whereby the maximum effectiveness in the protection of the Requesters' interests requires that the defect of form through omission of an essential formality be known, particularly because this defect affects the possibility of the Tribunal knowing the real and effective content of the impugned act.
Concerning the Requesters' right to compensatory interest, this shall necessarily, and always, be treated last, since its assessment will be informed by what is decided regarding the defect pointed out by the Requesters to the impugned tax act.
Given the above, we shall commence with knowledge of the alleged insufficient investigative activity by the AT, which constitutes a defect of form through omission of an essential formality.
Defect of form through omission of an essential formality – violation of the principle of inquiry
The Requesters allege that the presumption of truthfulness of the taxpayers' declarations arising from article 75 of the LGT, although rebuttable, can only be put into question if and when the AT, unequivocally, demonstrates the existence of a tax fact not reflected in such declarations or undermines the content of the declaration through investigative activity.
Thus, the obligation falls on the AT to bring to the tax procedure elements that allow the legal presumption to be rebutted, it being that, in this context, the AT's activity is shaped by the principle of inquiry enshrined in article 58 of the LGT, which imposes on it the duty to practice all acts and investigative steps that prove necessary to the reconstruction of material reality.
In this measure, the AT could not, without more, issue a final decision in the tax procedure based solely on information received within the scope of the information exchange mechanism, without attesting to the material reality that underlies it, particularly in light of elements brought by the taxpayer himself to the tax procedure.
For its part, the Respondent maintains that with the information received from the Swiss Tax Authorities, pursuant to the Savings Directive (Directive 2003/48/EC of the Council of 3 June 2003), it has full probative force, pursuant to article 76 no. 1 and 4 of the LGT, and proof having been made, by the AT, that the legal requirements that legitimize the alterations of declared income are verified, the presumption of truthfulness of the declarations ceases and the burden of proof to the contrary falls on the taxpayer, namely, to prove that the declared amounts correspond to the amounts received.
Considering that the Requesters did not cooperate with the AT, nor filed any document proving income obtained in Switzerland, the AT defends that, in cases where the burden of proof falls on the taxpayer, once the principle of inquiry does not obligate the AT to investigate claims without the minimum evidentiary support.
Let us see:
Pursuant to article 75 no. 1 of the LGT the declarations presented by taxpayers are presumed to be true and in good faith, until proven otherwise.
In accordance with the provision in no. 1 of article 74 of the LGT, the burden of proof of facts constituting rights of the tax administration or taxpayers falls on whoever invokes them. (emphasis ours)
Additionally, pursuant to no. 1 and 4 of article 76 of the LGT, information provided by foreign tax administrations, pursuant to international conventions of mutual assistance to which the Portuguese State is bound, have the force of proof when substantiated and based on objective criteria.
Now, in making corrections to the 2012 IRS declaration, in particular to Annex J of model 3, presented by the Requesters, for alleged omission of declaration of income, without having demonstrated that it was in possession of documents that effectively proved the receipt of other interest income, the AT failed to rebut the presumption of truthfulness of the Taxpayers' declarations.
In effect, the AT assessed, additionally, IRS, on the basis of information provided by the Swiss Tax Authorities, to which the Requesters never had access.
Only in the arbitral proceedings did the AT file, as document no. 1 a table elaborated by the services, as a means of proof of income earned by the Requesters. And, subsequently, after presentation of arguments, after being notified by the Tribunal to file with the case a partial extract of the computer file of the Swiss Tax Authorities, in which the income earned by the Requesters in 2012 was identified, the AT filed a print screen of an excel table, written in Portuguese, and in all respects similar to the document filed under no. 1 with the Response.
For what matters to the question posed in this case, it is necessary to make reference to Directive 2003/48/EC (also known as the Savings Directive), of the Council, of 3 June 2003 relating to the taxation of savings income in the form of interest, which in its article 1 provides as follows:
"The objective of this Directive is to enable savings income in the form of interest, paid in one Member State to a beneficial owner who is a natural person resident for tax purposes in another Member State, to be effectively taxed in accordance with the legislation of the latter Member State."
The said Directive was transposed into the domestic legal order by Decree-Law no. 62/2005, of 11 March, legislation which establishes the regime for obtaining and providing information by paying agents regarding savings income in the form of interest of which natural persons resident in national territory or another European Union Member State are beneficial owners (cf. article 1).
In the case at hand, savings income in the form of interest earned by the Requesters in Switzerland, a third country outside the European Union (EU), is at issue and for that reason the Directive 2003/48/EC, of the Council, of 3 June 2003 (Savings Directive) does not appear applicable, as it only binds the Member States which are recipients.
It is therefore important to refer to the Agreement between the European Community and the Swiss Confederation, approved by Council decision of 02/06/2004 and published in the Official Journal of the European Union, series L, no. 385, page 30, of 29.12.2004, which provides for measures equivalent to those provided for in Directive 2003/48/EC, of the Council, of 3 June 2003 (as stated in the text of the Agreement) relating to the taxation of savings income in the form of interest, applicable by virtue of the provision in the Treaty establishing the European Community[4], articles 1 and 2 being (in the part that is relevant here) as follows:
Article 1
Withholding by Swiss paying agents
- Interest paid to beneficial owners, as defined in article 4, who are resident in a Member State of the European Union, hereinafter referred to as "Member State", by a paying agent established in the territory of Switzerland, are, pursuant to no. 2 of article 2, subject to a withholding on the amount of interest paid. The withholding rate is 15% for the first three years from the date of application of this agreement, 20% for the three subsequent years and, thereafter, 35%.
(…)
- Switzerland must take all necessary measures to ensure that paying agents established in Swiss territory perform the functions required for the application of this agreement and that specific provisions are provided regarding procedures and sanctions.
Article 2
Voluntary disclosure of information
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Switzerland must establish a procedure that allows the beneficial owner defined in article 4 to avoid the withholding specified in article 1, by expressly authorizing his paying agent in Switzerland to notify the competent authority of that State of interest payments. This authorization shall cover all interest payments made to the beneficial owner by that paying agent.(emphasis ours)
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The minimum content of the information to be communicated by the paying agent in the case of express authorization by the beneficial owner includes, at least, the following elements:
a) Identity and residence of the beneficial owner, determined pursuant to article 5;
b) Name or designation and address of the paying agent;
c) Account number of the beneficial owner or, failing that, identification of the credit giving rise to the payment of interest; and
d) Amount of interest paid calculated pursuant to article 3
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The competent authority of Switzerland communicates the information referred to in no. 2 to the competent authority of the Member State of residence of the beneficial owner. This communication shall be automatic and shall take place at least once per year, within six months following the end of the fiscal year in Switzerland, in relation to all interest payments made during that year.
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Whenever the beneficial owner chooses this voluntary information disclosure procedure or declares the interest income obtained from the Swiss paying agent to the tax authorities of his Member State of residence, the interest income in question shall be subject to taxation in that Member State at the same rates as those applied to similar income generated in that State.
From all that has been stated above, it results unequivocal that it was the duty of the AT to prove the existence of the tax fact, since it failed to rebut the presumption of truthfulness of the Taxpayers' declarations, which, moreover, were founded on documents issued by banking entities (one Portuguese and one foreign), and accepted by the AT to prove the declaration of income (interest) obtained by the Requesters.
And contrary to what is invoked by the AT, the Requesters, nor the Arbitral Tribunal having access to the information provided by the Swiss Tax Authorities, nor can any consideration be made about its probative force.
On the other hand, with all due respect, the documents filed by the Respondent, timely challenged by the Requesters, lack probative force, for the following reasons: (i) because they are not the official information provided by the Swiss Tax Authorities, (ii) they do not comply with the criteria of article 2 of the Agreement between the European Community and the Swiss Confederation, (iii) and they are not properly substantiated[5].
It is today consolidated jurisprudential and doctrinal understanding that "administrative acts in general (tax acts included here) do not enjoy a presumption of legality, the burden of proof of the verification of the legal requirements of decisions positive and unfavorable to the recipient falling on the AT, such as the existence of tax facts and their respective quantification (except for the exceptions in article 121 no. 2, of the CPT), this when the act practiced by it has as its basis the existence of the tax fact and its quantification. [6]
And in this context, the activity of the Tax Administration within the scope of the tax procedure is shaped by the principle of inquiry, inherent in article 58 of the LGT, pursuant to which "the tax administration must, in the procedure, perform all steps necessary to the satisfaction of the public interest and the discovery of material truth, not being subordinated to the initiative of the author of the request."
The principle of inquiry finds its justification in the obligation of pursuit of the public interest to which the administration is bound, pursuant to article 266 no. 1 of the CRP and 55 of the LGT, and is also a corollary of the duty of impartiality that guides public activity.
This duty of impartiality demands that the AT seek to bring to the procedure all evidence relating to the factual situation on which the decision will be based, even if such evidence is intended to demonstrate facts whose proof is contrary to the patrimonial interests of the Administration. In conclusion, this principle obligates the tax administration to perform all steps that appear necessary to the satisfaction of the public interest and the discovery of material truth. This means that all steps must be performed even if the same were not requested, not depending on any procedural impulse from the taxpayer.
In the words of Lima Guerreiro[7]: "(…) the failure to investigate elements necessary to the discovery of material truth with the consequent violation of the principle of inquiry is grounds for the illegality of the tax act or in tax matters.(…)"
In this sense Duarte Morais also states that: "(…) Because the effectiveness of the principle of investigation is a right of taxpayers, tax acts and others, conclusive of procedures, are voidable, in which it appears that the Administration has not complied, within reasonable limits, with the obligations that arise for it from such principle.(…)
(…) In situations where it is found that no investigative procedure has taken place or more frequently, where it is found that it was deficient or incomplete, the legal question will be resolved by the relevance of the procedural defect, the act being to be annulled due to formal defect. Thus, there can be no investigative activity on the part of the court, surrogate or supplementary to what (was not) performed.
That is, before assessing the evidence produced, one must determine - as an autonomous question - whether the investigation undertaken was sufficient, whether it was reasonably possible and required that the tax administration, on its own initiative or following a request from the interested party, carry the investigative activity further(…)"[8]. Emphasis ours.
Still in the words of this author, "(…) the principle of investigation does not exclude the duty of cooperation on the part of the taxpayer and others obligated. (…). But even in cases where the law negatively values the lack of cooperation by taxpayers, it does not follow that such silence can be understood as tacit admission. (…)"
In the situation under scrutiny, we understand that it was the duty of the Tax Administration to perform all steps necessary to the discovery of material truth - also as a matter of greater ease of interaction - in order to obtain additional means of proof from the Swiss Tax Authorities, namely with a view to obtaining complete information about the income obtained, the paying entity and other elements provided for in the Agreement concluded between the European Community and the Swiss Confederation, which would allow to conclude, without doubt, that the Requesters earned the income which is the subject of this case and which gave rise to the additional assessment.
However, before proceeding, it is necessary to make a critical reflection on the judgments cited by the AT and, in this particular, it appears to us irrefutable that from all of them it results unequivocal that the burden of proof of facts constituting rights falls on whoever invokes them (article 74 no. 1 of the LGT and 342 of the Civil Code), whereby, in the situation under scrutiny, having assessed the means of proof filed with the PA and the arbitral proceedings, it was the duty of the AT to prove the existence of the tax fact or, in other words, the fact constituting the right to tax.
Also in this regard Rui Duarte Morais notes that "The question of assessment of evidence is necessarily situated at a moment subsequent to its collection. A sequence that is important to reiterate. In a first moment, the question is placed of whether the tax administration complied with the duty to perform all steps reasonably necessary to clarify the factual situation, to establish material truth. If such has not occurred, the decision suffers from an instructional deficit, it is not duly substantiated."[9]
This means that, in the first place, the AT must proceed with all steps necessary and convenient to the discovery of material truth, and only when such steps are insufficient should one resort to the rules on burden of proof.
It is also in the instruction phase of the procedure that the AT must bring to the process all elements of evidence that may serve to substantiate, validly and correctly, the taking of decisions, hence the concern with the matter of burden of proof.
Given this, taking up the words of the AT, stated at fl. 5 of its final arguments, "There is not filed with the case a document issued by the Swiss tax authorities or any other document proving the amount of interest income obtained by the Requesters in that 2012 fiscal year."
The truth is that the AT failed to demonstrate, by any legally admissible means of evidence, that the Requesters earned interest income, in excess of what was declared, in the amount of € 144,372.68. We are faced with an absence of proof regarding the amount of income obtained by the Requesters, regardless of knowing to whom fell the obligation to prove receipt of such income.
To wish to impose on the Taxpayer the obligation to conduct evidentiary steps intended to prove that it did not receive interest income from a foreign source, or that it only received what it declared and accepted by the AT, is to invert the principles of tax procedure and the rules on burden of proof.
For this reason, it is necessary to conclude that the tax acts in question are tainted with the defect of form through omission of an essential formality, on the grounds of violation of the principle of inquiry, which requires their annulment.
Illegality of the assessment of compensatory interest
Compensatory interest is due when, by a fact attributable to the taxpayer, the assessment of part or all of the tax owed or the payment of tax payable in advance, or withheld or to be withheld within the scope of tax substitution, is delayed.[10]
In effect, the right to compensatory interest implies that there has been a delay in the assessment or payment of tax due to the fault of the taxpayer.
Whereby, the additional IRS assessment being annulled based on the violation of the principle of inquiry by the AT, the fault of the taxpayers, here the Requesters, is immediately excluded and, consequently, the illegality of the assessment of compensatory interest computed by the AT is equally recognized.
Illegality of the tax act on the grounds of error of law
Given what has been decided regarding the alleged defect of form through violation of the principle of inquiry, knowledge of the substantive defects which the Requesters impute to it is prejudiced, that is, the error of law attributable to the services, which will not be the subject of assessment and decision.
Compensatory Interest
The Requesters request compensatory interest, pursuant to articles 43 and 100 of the LGT, calculated on the total amount of € 40,970.44, from the date of voluntary payment until the issuance of the respective credit note.
The right to compensatory interest as a guarantee of taxpayers is provided for in article 43 of the LGT and has, at its origin, the fact that the taxpayer has paid undue taxes by virtue of errors attributable to the services or the non-compliance by these of certain legal deadlines[11].
In this particular it is not relevant the type of error (whether it was factual or of law) nor the degree of fault, particularly because objective responsibility of the services is at issue[12].
It has been considered in the numerous case-law of the STA regarding compensatory interest that the expression used in article 43 of the LGT, "error" and not "defect" or "illegality" to refer to the facts that may serve as a basis for the attribution of interest, means that the legislator had in mind error regarding the factual requirements and error regarding the legal requirements.[13]
In the concrete case, it is necessary to give particular attention to the provision in no. 1 of the said article 43, which establishes that compensatory interest is due when, there being error attributable to the services, such error results in "payment of the tax debt in an amount greater than that legally due".
It should be noted, from the outset, that it refers to error and not defect, which inculcates that what is intended to be emphasized are errors regarding factual requirements or legal requirements that led the Tax Administration to an illegal definition of the taxpayer's tax situation, not considering the formal or procedural defects which, although affecting the legality of the act, do not necessarily imply an erroneous definition of such situation.
Thus, the defect of form through omission of an essential formality – which, in this case, will lead to the annulment of the impugned tax acts – means that there was a violation of the procedural rights of the administered and, for this reason, the annulment of the act is justified as it is affected by illegality. This type of error is not included within the scope of the requirement of error attributable to the services generating the right to compensatory interest, as it does not materialize in defective assessment of relevant factuality or in incorrect application of legal norms, not preventing, moreover, the Tax Administration from renewing the substance of the act[14].
Compensatory interest has, in effect, its justification in the need to compensate the taxpayer for the unavailability of the capital of which it was deprived by virtue of the illegal demand for tax by the Tax Administration.
However, if the tax act must be annulled, as illegal, but that illegality does not translate into an erroneous definition of the tax situation, then, one cannot speak of either patrimonial injury, nor of damage, nor of liability, nor, consequently, of reparation by way of indemnification.
In the concrete case, after the issuance of this arbitral decision it will be known only that there is a formal defect of the additional IRS assessment act for the year 2012 that makes it illegal and, therefore, voidable.
The AT may practice a new act of equal content, requiring the same tax, without being required to correct any error of fact or of law, nor to conclude differently. It may, thus, the AT take the same facts and the same law and conclude in the same way, provided that it eliminates the defect verified by this arbitral decision, obtaining the means of evidence to the substantiation of the tax act. What demonstrates that one cannot speak, for now, of an injury deserving reparation translated into compensatory interest[15].
It is therefore necessary to conclude that the Requesters do not have the right to the requested compensatory interest, due to the absence of the necessary factual and legal substrates.
8. Decision
In these terms, in accordance with what has been stated above, it is decided to judge successful the declaration of illegality of the additional IRS assessment act no. 2016…, on the grounds of a defect of form through omission of an essential formality due to insufficient investigative activity, and consequently to order the annulment:
- Of the additional IRS assessment in the amount of € 36,017.34;
Of the assessment of compensatory interest, in the amount of € 4,953.10;
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To order the restitution of the tax paid;
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To judge unfounded the request for payment of compensatory interest, absolving the Respondent thereof;
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To condemn the Tax and Customs Authority to the payment of the costs of the present proceedings.
9. Value of the Action
It is fixed at € 40,970.44 in accordance with the provision in articles 315 of the CPC, article 97-A no. 1 a), of the Tax Procedure and Process Code, applicable by virtue of paragraphs a) and b) of no. 1 of article 29 of the RJAT as well as no. 2 of article 3 of the Regulation of Costs in Arbitration Proceedings well as of article 4 no. 4 of the said Regulation.
10. Costs
The arbitration fee is fixed at € 2,142.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Respondent, since the request was entirely successful, pursuant to articles 12 no. 2, and 22 no. 4, both of the RJAT, and article 4 no. 4 of the said Regulation.
Notice shall be given.
Lisbon, 14 November 2017
The Arbitrator
(Cristina Coisinha)
Text prepared by computer pursuant to the provision in article 131 no. 5 of the CPC, applicable by reference of article 29 of the RJAT.
The preparation of this decision is governed by the spelling prior to the Orthographic Agreement of 1990.
[1] See also the annotation to article 36, page 382, of the cited annotated CPPT
[2] Tax Procedure and Process Code, annotated and commented, 2006, Volume I
[3] In this sense, Jorge Lopes de Sousa, in "Tax Procedure and Process Code – Commented and annotated", volume II, 6th edition, 2011, Áreas Editora – annotations 4 and 6, to article 120, p. 296 and 297 and also the Judgment of the Central Administrative Court South, issued on 18 September 2012, in case no. 05517/12, available for consultation at www.dgsi.pt
[4] See Circular no. 6/2006, of 09 March – Article 15, available at: https://info.portaldasfinancas.gov.pt/NR/rdonlyres/ABB1915E-7336-4D77-B538-A9A9A74000F3/0/Circular_6-2006.pdf
[5] Article 76 of the LGT.
[6] Judgment of the STA, issued within case no. 01836/03, available at http://www.dgsi.pt/jsta.nsf/35fbbbf22e1bb1e680256f8e003ea931/c3106a5dec84439780256e31004fa623?OpenDocument
[7] General Tax Law annotated, 2001, Rei dos Livros Publishers, pages 265 and 266
[8] Rui Duarte Morais, in Manual of Tax Procedure and Process, Edition of 2014, Almedina, pages 63 to 68
[9] Rui Duarte Morais, in Manual of Tax Procedure and Process, Edition of 2014, Almedina, page 73
[10] Article 35 no. 1 of the LGT
[11] Jesuíno Alcântara Martins, José Costa Alves, in Tax Procedure and Process, Edition of 2015, Almedina, page 66
[12] Rui Duarte Morais, in Manual of Tax Procedure and Process, Edition of 2014, Almedina, pages 365 to 376
[13] Judgments issued in appeals nos. 622/08, of 29.10.2008, 945/08, of 21.01.2009; 347/09 of 25.06.2009 and 665/09 of 04.11.2009.
[14] Judgments of the STA issued in cases 1091/09, 410/12, of 03-02-2010 and 30-05-2012, respectively
[15] In this sense see the arbitral decision issued within case 394/2014-T, available at https://caad.org.pt/tributario/decisoes/
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