Summary
Full Decision
ARBITRAL DECISION
The arbitrators Cons. Jorge Lopes de Sousa (arbitrator-president), Dr. Pedro Miguel Bastos Rosado and Dr. Hugo Daniel Ferreira Leite Henriques (arbitrator-members), appointed by the Ethical Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 29-05-2017, agree as follows:
1. REPORT
A… LDA, legal entity no.…, with registered office at Rua …, n.º … -… …-… Aveiro, (hereinafter designated as "Claimant"), submitted, pursuant to Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters or "RJAT"), a request for arbitral pronouncement seeking:
– Immediate object - Declaration of illegality of the decision that dismissed the hierarchical appeal against the decision denying the Gracious Complaint lodged with the request for annulment of the additional IRS assessment (withholding tax) and compensatory interest, carried out with reference to November 2011;
– Mediate object – Declaration of illegality of the tax acts of additional IRS assessment - Withholding on Source - Capital - Other Income, carried out by the Tax Authority with reference to November 2011, in the amount of € 72,413.58 and compensatory interest in the amount of € 1,610.95, for a total of € 74,024.53 (seventy-four thousand twenty-four euros and fifty-three cents).
The TAX AUTHORITY AND CUSTOMS SERVICE is the respondent.
The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax Authority and Customs Service on 24-03-2017.
Pursuant to article 6.º, n.º 2, alínea a) and article 11.º, n.º 1, alínea b) of RJAT, in the wording introduced by article 228.º of Law no. 66-B/2012, of 31 December, the Ethical Council appointed as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the appointment within the applicable period.
On 11-05-2017 the parties were duly notified of this appointment, having manifested no intention to refuse the appointment of the arbitrators, in accordance with article 11.º, n.º 1, alíneas a) and b) of RJAT and articles 6.º and 7.º of the Ethical Code.
Thus, in accordance with article 11.º, n.º 1, alínea c) of RJAT, in the wording introduced by article 228.º of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 29-05-2017.
The Tax Authority and Customs Service presented a response in which it argued that the claim should be dismissed.
By order of 18-09-2017 a hearing was dispensed with and it was decided that the proceedings would continue with written submissions.
The parties submitted written submissions.
The arbitral tribunal was regularly constituted, in accordance with articles 2.º, n.º 1, alínea a), and 10.º, n.º 1, of Decree-Law no. 10/2011, of 20 January, and is competent.
The parties are duly represented, enjoy legal personality and capacity, and have standing (articles 4.º and 10.º, n.º 2, of the same instrument and article 1.º of Order no. 112-A/2011, of 22 March).
The proceedings do not suffer from any defects of nullity.
2. MATERIAL FACTS
2.1. Proved Facts
Based on the elements contained in the proceedings and in the administrative file appended to the records, the following facts are considered proved:
- The Claimant is a limited liability company constituted on 11-08-1992 for the provision of medical services;
- The share capital of five thousand euros is distributed among the following shareholders and shares:
– B… holder of a share with nominal value of € 2,750.00 representing 55%;
– C…, spouse of the former, holder of a share with nominal value of € 2,000.00 representing 40%; and
– D… holder of a share with nominal value of € 250.00 representing 5%;
- Shareholders B… and C…, married under a joint property regime, hold 95% of the share capital of the Claimant;
- The management has been, since the constitution of the company, entrusted to shareholder B…, licenciate in Medicine, specialist physician in internal medicine;
- The managing shareholder B… exercises, on a full-time basis, his activity as a specialist physician, on behalf of the University Hospital of Coimbra;
- In addition to this activity, he provides services within his medical specialty, on behalf of the Claimant company;
- The Tax Authority and Customs Service carried out an external tax inspection of the Claimant, which began on 10-11-2011 and ended on 15-06-2012 (page 4 of the Tax Inspection Report);
- In that inspection action, the Tax Inspection Report was drawn up, which forms part of the administrative file, whose content is hereby reproduced, in which the following is mentioned, among other things:
CONCLUSIONS
Based on the facts and the framework already detailed above, it is important to summarise the elements supporting the proposed taxation:
- The recording in the accounts complies with rules enshrined in the Chart of Accounts (POC) and in the Accounting Standards System (SNC).
- The assessment and control of movements occurring in the accounts, including the "Cash" account, "Reserves" and "Retained Results", comply with norms, principles and good practices.
- Based on accounting and declarative standards, without proof to the contrary, the declarations presented by the taxpayer are considered true and made in good faith.
- Without substantiation, it is only possible to distort those principles by alleging that the tax facts are not those arising from the accounting records, but others that relate to expired periods and are therefore not taxable.
- No relationship was established between the income obtained and loans, provision of work or exercise of social office.
- The income paid by the taxpayer was classified as distribution of profits or advances on account of profits, and therefore falls within category E - capital income - articles 5.º and 6.º, both of the Personal Income Tax Code, as results both from the allegations of the taxpayer himself and from the withholding tax assessments made by him, which he alleges are due, in the course of the inspection procedure.
- Regarding the amount subject to taxation, the value corresponding to the entirety of the balance was fixed, which according to the accounting should be shown in the "Cash" account and which on 10 November was found not to exist.
- As to the time of taxation, November 2011 was fixed - the month in which the balance of the "Cash" account was assessed and its non-existence identified; accordingly it was considered that the placing at disposal occurred on 9 November - article 7.º of the Personal Income Tax Code;
- Note that, as a result of the factual evidence gathered by the Tax Authority and Customs Service, no serious, objective and substantiated indications were identified that revealed that the taxable reality, that is, the tax fact, was other.
- The taxpayer, confronted with the facts and the associated framework, from the moment the discrepancy in the "Cash" account balance was identified, merely argued that the distribution of profits occurred in periods and amounts of his choosing, without however presenting any evidence that would weaken the position of the Tax Authority and Customs Service. Referring only, in support of a lower taxation to which he would thereby be subject.
- The taxpayer presented as the only evidence of proof, minutes dated 31 March of the years 2007 to 2011, which refer to the distribution of results to shareholders and which contradict the accounting presented by him, relating to the various years of activity.
- It should be noted that those minutes were signed by the company shareholders, Dr. E… and Dr. C…, who are married, and Dr. D…, brother of Dr. E….
- Nor did he dare present any sustainable evidence of the moment when the placing at disposal to the shareholders of the difference found in the "Cash" balance occurred.
- No element was presented that would allow sustaining the existence of financial flows between the company and the shareholders that would permit concluding that the amounts in "Cash" were withdrawn at a time prior to 10 November 2011.
- The lack of such evidence prevents the necessary steps being taken to verify its validity and the possible conclusion that the time of taxation does not relate to 10 November 2011, but to some other prior moment.
- The Tax Authority and Customs Service sustains the tax fact (nature, amount and time) on the elements that in a more legal, logical, obvious, natural and verifiable manner result from the accounting of the taxpayer (the persistence over time of the "Cash" balance).
- Given the factual and legal assumptions identified by the Tax Authority and Customs Service, the legal qualification of the nature, amounts and times proposed for taxation is considered well-founded, both as to form and substance, and thus considered unambiguous.
- Note that, given the non-existence of the balance in the "Cash" account and with no document or accounting record of such transfer as was obligated to make, no conclusion other than that the withdrawals occurred as a distribution and advance on account of profits can be reached. This follows from verification of the requirements for applicability of the legal presumption referred to in n.º 4 of article 6.º of the Personal Income Tax Code.
- What in fact proves relevant is that the difference found in the "Cash" account balance entered the patrimony of the shareholders (which was moreover admitted both by the taxpayer's own submissions and by the assessment, in the course of the inspection procedure, of the withholding tax). By this fact their tax capacity increased, although the tax due on that obvious and significant increase in income had not been levied.
- It should be emphasised that one who distributes profits while making no record in the accounting cannot fail to be taxed, when one who distributes the same profits properly records them in appropriate accounts in the accounting is taxed. If the first result were permitted, it would be possible to allow "lower" taxation for "greater" non-compliance with a tax reality that is rigorously identical.
- Nor he who, giving knowledge of the tax fact in 2012, in the context of an inspection procedure, attempts to impute it to earlier periods, with the objective of obtaining tax advantages.
- Now, if the distribution of profits were to be verified in the years 2008 to 2010, the taxpayer should declare the respective distribution in those years, and thus give knowledge to the Tax Authority and Customs Service.
- If the taxpayer did not declare any distribution of results in the years in which he claims it occurred, and the Tax Authority and Customs Service has no other way of knowing about it, nor is obligated to know of it, the tax fact must be considered verified, for purposes of expiration of the right to assessment, at the moment when the taxpayer records it in the accounting. For only on that date should the Tax Authority and Customs Service legally be considered aware of the distribution of results, and not at the moment when the taxpayer sees fit to allege, without proving it.
- Despite it not being possible for us to prove the entry of money into the shareholders' accounts, this also proves unnecessary. Indeed, income placed at disposal of shareholders does not necessarily have to be deposited in bank accounts or be of objective knowledge.
- What is relevant is the appropriation (with full property right) of income to the shareholders and not the actual verification of the destination given to it. Indeed, taxation is based on the placing of income at disposal of the shareholders and not on the appropriation that these may give to such income.
- Note also that the conclusion that the income was attributed is based on the fact that the money that existed in "Cash" ceased to be recorded there. With no other justification for the fact, only appropriation by the shareholders is credible.
- It is further important to note that, even if it could occur that the distribution of the "Cash" account balance was not proportional to the shareholders' participations, as the Commercial Code establishes in principle, for taxation purposes, such fact is irrelevant, since the total amount of income placed at disposal of the shareholders prevails, regardless of its distribution.
- We cannot fail to recall the support given to the case at hand by virtue of decisions established by various Court Rulings and opinions published by the Order of Official Accounting Technicians itself.
- In summary, and to recall, the taxation now proposed results directly from the conclusion, duly substantiated, that the shareholders saw their tax capacity increased by virtue of the availability conferred on them with the assignment of the values that were in the "Cash" account.
- Any other alternative of taxation would lack substantiation of arguments that would have to be manifestly evident and consistent, and the corresponding proof could only be in the possession and accessibility of the taxpayer, which was never presented to us.
- As a result, with the facts described it is concluded that the taxpayer sought to remove from the company for the benefit of the shareholders its results, avoiding taxation thereof, both at the level of the company and of the shareholder.
- The amount in question, because it results from gains of the company of which its shareholders were beneficiaries, should be considered as distribution of profits already obtained and future, and therefore constitutes income thereof, subject to taxation in Personal Income Tax, category E, in accordance with article 6.º, n.º 1, alínea h), of the Personal Income Tax Code.
- It is further important to emphasise the fact that the taxpayer only on 23 March 2012, in the course of the inspection procedure, proceeded to assess the withholding tax which he alleges is due, quantifying and identifying the times when the distribution of results allegedly occurred, without proving those facts.
- The accounting and all financial statements presented by the taxpayer have no support in the minutes now exhibited.
- What the taxpayer now comes forward with, that is, in the course of the inspection procedure, to present the minutes dated as the date when he allegedly decided to proceed with the distribution of results, are the only documents impossible to validate, and are precisely those that contradict all the other elements approved, presented and recorded by the taxpayer.
- Given the foregoing, considering that the distribution of results in the amount of € 490,800.85 occurred on 10 November 2011, the assessments made by the taxpayer should not be accepted with effect from December/2008, December/2009 and November/2010, in the amounts of € 11,566.60, € 10,102.80 and € 11,439.20 (to which correspond the taxable bases of € 57,833.00, € 50,514.00 and € 53,205.58), but rather a single withholding tax assessment relating to 9 November 2011 in the total amount of € 490,800.85 to which corresponds tax of € 490,800.85 x 21.5% = € 105,522.18. Given that the exempting rate of withholding tax provided for in alínea c) of n.º 1 of article 71.º of the Personal Income Tax Code, in 2008 and 2009, was 20%, the assessment made by the taxpayer in the periods December/2008 and December/2009, for a total of € 21,669.40, when reported to November 2011 should be increased by € 1,625.21 [(€ 57,833.00 + € 50,514.00) x 1.5%].
- Thus, the corrections to be made in the period November 2011 will be € 72,413.58 [(€ 490,800.85 - € 57,833.00 - € 50,514.00 - € 53,205.58) X 21.5% + [(€ 57,833.00 + € 50,514.00) x 1.5%]]. It is concluded therefore that the taxpayer himself admits the nature of that income, as capital income resulting from the distribution of profits or advances on account of profits referred to in alínea h) of n.º 2 of article 5.º of the Personal Income Tax Code. The taxpayer, apparently with merely tax objectives, only disagrees with the time when the distribution occurs, without at any point substantiating his submissions.
Subsequently, information should be prepared addressed to the Taxation Division of the Finance Office of Aveiro, in order to alter the date appearing in the forms submitted by the taxpayer, relating to the withholding tax assessments, from the periods December/2008, December/2009 and November/2010, such date now to appear as November 2011.
- Following the inspection action, withholding tax assessment no. 2012…, in the amount of € 72,413.58 and compensatory interest assessment no. 2012…, in the amount of € 1,610.95 were drawn up; (document no. 1 attached with the request for arbitral pronouncement, whose content is hereby reproduced);
- On 27-12-2012, the Claimant filed a Gracious Complaint against the assessment, which was denied by order of 07-05-2013, with reference to information (relating to the draft decision and the decision) whose content is hereby reproduced, in which is mentioned, among other things, the following:
2.2. Analysis
2.2.1. Origin and Grounds of the Corrections
The claimant was subject to an external inspection action, which had as its purpose carrying out a physical count of the cash values of the company, seeking to compare that physical reality with the accounting evidence shown in the "11 - Cash" account - cf. report at pages 29 to 48 of the records. On 9 November 2011 the "Cash" balance was € 492,030.85. From the count of the Cash values, carried out on 2012-11-10, it was declared by the taxpayer that the only values the company had in cash corresponded to the amounts from consultations performed on 7 and 8 November 2012, which totalled € 1,230.00.
Based on alínea h) of n.º 2 of article 5.º of the Personal Income Tax Code, the discrepancy in the "Cash" balance totalling € 490,800.85 (492,030.85 - 1,230.00), was considered as a distribution of profits (up to the extent of the balance of account 56 - Retained Results, in the amount of € 475,692.59) and as an advance on account of profits, in the remaining amount to make up the balance shown in the "Cash" account which was proven not to exist, that is, € 15,108.26 (€ 490,800.85 - € 475,692.59).
In this way, the amount of € 490,800.85 is subject to a withholding tax at the rate of 21.5% which amounts to € 105,522.18 (€ 490,800.85 x 21.5%), as provided for in alínea c) of n.º 1 of article 71.º of the Personal Income Tax Code, which should be paid by the 20th day of the month following that to which it relates.
It was thus demonstrated that the amount of € 105,522.18 refers to withholding tax in default, as capital income - profits and advances on account of profits - was placed at disposal without the same having been levied.
2.2.2. Arguments Invoked by the Claimant
The claimant does not agree with such corrections, alleging in summary:
- The Tax Authority presumed that the distribution of profits and advances on account of profits occurred on the date of the fiscal verification of cash;
- The Tax Authority only proved that the values appearing in the cash balance did not exist in the claimant's cash/safe;
- It was necessary to determine the moment when the values appearing in the book cash balance had been placed at the disposal of the holders of capital;
- The claimant proceeded, in the course of the tax inspection procedure, to calculate the tax that, with respect to profits and advances on account of profits it placed at the disposal of its holders in the period from 2008 to 2010.
- Considering that with respect to tax facts occurring in periods prior to 2008, expiration occurred, as a peremptory exception provided for in article 45.º of the General Tax Law;
- Proposing to present evidence of the moment when the income was actually placed at the disposal of its holders through statements from their bank accounts;
- On the other hand, under article 74.º of the General Tax Law, it was incumbent on the Tax Authority to prove the facts alleged, that is, to prove that the tax fact occurred on the date of the physical count of cash;
- The tax act is illegal for violation of article 74.º of the General Tax Law;
- The tax act is also illegal for violation of the principle of discovery of material truth enshrined, among others, in article 58.º of the General Tax Law.
- The assessment of compensatory interest which the Tax Authority effected in the amount of € 1,610.95 should be annulled.
2.2.3. Analysis of the Complaint
The Inspection verified there was a discrepancy between the value found in the physical count of the "Cash" and its accounting value, in the following amount:
• Accounting balance of account 11 - Cash on 09 November 2011 € 492,030.85
• Balance of "Cash" values found with physical count € 1,230.00
Confronted with the facts, the taxpayer admitted that the discrepancy was due to withdrawals of money as distribution of profits or advances on account of profits, which were not recorded in the accounting as such.
The nature of the income is assumed by the taxpayer, recognising that it is capital income resulting from the distribution of profits or advances on account of profits referred to in alínea h) of n.º 2 of article 5.º of the Personal Income Tax Code.
The question that arises is to determine the moment when the tax facts related to the placing of profits at the disposal of their holders occur.
The claimant argues that there was successive distribution of results since 2006, having made no record in the accounting nor made payment of the tax, and therefore proposes the taxation of results ascertained in the last 4 years, arguing that the right to assess results distributed previously has expired.
The Inspection concludes that the tax fact occurred on the day when the verification of the Cash balance was carried out, in the context of the inspection action, therefore, 10 November 2011.
N.º 1 of article 75.º of the General Tax Law provides that, "Declarations of taxpayers presented in accordance with the terms provided in the law are presumed true and made in good faith, as well as data and findings recorded in their accounting or books, when these are organised in accordance with commercial legislation".
No indication was observed by the Inspection that would lead it to question the accounting presented to it, and therefore it considered as true the values and results presented by the financial statements of the years analysed.
The detailed analysis of the accounting for periods prior to the verification that the "Cash" balance had been distributed did not allow the Inspection to gather indications that such non-existence of the "Cash" balance could be traced to any of the years now analysed, that is, 2008, 2009 or 2010 (as the taxpayer proposes by submitting withholding tax returns for Personal Income Tax for the years referred to).
There is no objective and sustainable evidence that the balance no longer existed in the company in periods prior to the verification of the cash balance by the Inspection.
It is thus concluded that the primacy of truth and good faith of the financial statements referred to in article 75.º of the General Tax Law is verified.
The claimant is not right when he states that the Tax Authority did not make efforts to prove the tax facts and the moment when they occurred.
The Tax Authority, through the inspection action, analysed and extracted all possible elements that the claimant's accounting provided, and it is not apparent what other elements it could have gathered.
During the inspection action the taxpayer merely argued that the distribution of profits occurred in periods and amounts of his choosing, without however presenting any evidence that would weaken the position of the Tax Authority and Customs Service.
Now, in the context of the gracious complaint, he attempts to present evidence of the moment when the income was actually placed at the disposal of its holders through some bank statements, statements which do not refer to the holders of the accounts.
In any event, even if they were accounts of the shareholders, the same do not prove that the amounts deposited and which appear separately are from the distribution of results. We thus have certain amounts deposited in those accounts on certain dates, without knowing, however, the origin of the same.
Compensatory Interest
The claimant alleges that he is unaware of the reasons why compensatory interest was assessed, which is to say that the assessments are not substantiated in accordance with what is legally required.
The notification relating to compensatory interest, now contested, refers to the nature of the interest claimed, due to withholding tax on Personal Income Tax, from the year 2011, and that interest is counted from the period of the respective withholding, until the correction, amendment or detection of the deficiency which motivated the delay in the assessment, reason why the notification reveals itself in conformance with the requirements embodied in the rules in force at the date of the tax fact, making cognizable to the claimant the reason for the assessment.
The claimant further alleges that "neither from the report nor from that 'Statement' can the claimant discern how the 'end date' was determined".
In accordance with what is stipulated in n.º 4 of article 35.º of the General Tax Law, "For the purposes of the preceding provision, in case of inspection, the deficiency is considered remedied or corrected from the notice of finding".
The "end date" appearing in the assessment note – 2012-07-10 – is the date on which it was drawn up as a notice of finding.
As to the allegation that "the Tax Authority does not indicate any fact demonstrating the existence of culpability of the claimant", we inform as follows:
In the face of the provisions of articles 35.º of the General Tax Law and 91.º of the Personal Income Tax Code, essential requirements for the assessment of compensatory interest are the existence of a Personal Income Tax debt, a delay in carrying out the assessment of the tax due or the payment of advance tax, or retained or to be withheld, and the imputability of the delay to a culpable action of the taxpayer.
The claimant proceeded to distribute profits and advances on account of profits referred to in alínea h) of n.º 2 of article 5.º of the Personal Income Tax Code and which are subject to withholding tax, at the exempting rate of 21.5%, which should be paid to the State by the 20th day of the month to which it relates.
Regarding the case at hand, the Supreme Administrative Court Ruling of 30-11-2011 (case no. 0619/11) is relevant, according to which:
- Also with respect to culpability, we accept that the substantiation suffices with the description of the conduct when, as in this case, it assumes the nature of an unlawful act. Indeed, doctrine and case law have come to support the thesis that when a given conduct constitutes a fact qualified by law as unlawful, such conduct should give rise - by logical inference - to the existence of culpability (not because culpability is presumed, but because it is something that, as a rule, is linked to the unlawful-typical character of the fact committed), and by this means one should proceed from the assumption that culpability exists whenever the taxpayer's action falls within the hypothesis of any tax infraction."
(...)
2. Draft Decision
In exercise of the right to a hearing, the claimant comes to submit the same grounds and facts already referenced in his petition, which have already been duly and clearly subject to assessment and explanation in the Draft Decision.
The claimant continues to allege that there was successive distribution of results since 2006, through "deliveries" that the shareholder deposits monthly into his bank account. To prove these "deliveries" the claimant attaches a copy of the bank statements of the managing shareholder's personal account.
As already referred to in the Draft Decision, the said statements do not prove that the amounts deposited in those accounts are from the distribution of profits carried out by the claimant, since the origin thereof is unknown.
Note that, as referred to on page 18 of the Inspection Report, in the case at hand the entering into specific c/c accounts of the shareholders did not materialize, but rather the fact that the amounts recorded in "cash" at the time of the physical count thereof were not there.
Based on the procedure adopted, the tax fact is considered to have occurred on the day when the verification of the "Cash" balance was carried out in the context of the inspection action, therefore, 10 November 2011.
The presumption inherent in n.º 5 of article 6.º of the Personal Income Tax Code can be rebutted but only as to the nature of category E income - distribution of profits or advances on account of profits - and not as to the moment of its obtaining.
- On 13-06-2013, the Claimant filed a hierarchical appeal against the decision on the gracious complaint;
- The hierarchical appeal was denied by order manifesting agreement with information whose content is hereby reproduced, in which is mentioned, among other things, the following:
2. Information
The appellant in this Hierarchical Appeal presents no new element capable of reversing the decision given in the gracious complaint process, having presented no new grounds capable of altering the conclusions reached. The questions at issue have already been analysed in the information provided when the gracious complaint was assessed, which we corroborate.
However, and without prejudice, the following should be mentioned:
1- The taxpayer seeks the annulment of the order appealed with a basis of illegality by error as to the factual and legal premises and the non-existence of a tax fact.
2- The appellant alleges that the liquid treasury surpluses were, over the years, distributed monthly to the shareholders, as a share in the company's profits, from which they came to have disposal for their personal economy.
3- These facts were never recorded in the accounting, which resulted in abnormally high cash balances. "Balances that it is concluded in a direct and objective manner are abnormally high if the data of common experience and good practices applicable to the movement of the cash account are considered" (our emphasis).
4- The appellant alleges that the existence in the books of an abnormal Cash balance constitutes a notorious fact that movements of the cash balance are missing to be recorded, and that being a notorious fact it does not require proof.
5- According to Dr. Joel Timóteo Ramos Ferreira, District Judge, in the magazine "O Advogado", II Series, June 2006:
"1.1. There are facts that speak for themselves. In addition to dispensing with any proof, they also dispense with their allegation. The parties do not even need to make reference to them, because they can be considered by the Judge in deciding a given matter. These facts are called notorious facts by procedural law (article 514.º, n.º 1 of the Code of Civil Procedure).
1.2. In the most classical definition, notorious fact is one that is of general knowledge. As Calamandrei refers (For the Definition of Notorious Fact, 1925, 1º, page 309), it is common knowledge among persons belonging to a given social sphere, this being constituted by a group of persons who, for various reasons - of time, religion, profession, culture, etc. - have common interests. Hence, doctrine has classified notorious facts into two species:
- Events of which the generality of people have become aware (e.g., an earthquake, a war, a cyclone, a flood, a fire, a political revolution, etc.);
- Facts that have acquired the character of notorious by indirect means, that is, through reasoning developed from facts of common knowledge.
1.3. In this line, Alberto dos Reis (Civil Procedure Code Annotated, III, p. 261) classifies as "notorious facts only those that are of general knowledge, that is, those known to the mass of regularly informed Portuguese citizens, that is, with access to normal means of information". Consequently, facts known only to a restricted sector of persons, with information far above average or of a very specific sector (e.g., matters of an economic nature, occurrences or functional practices of a profession) cannot be considered notorious.
6- Now, it is not the knowledge of the generality of normally informed citizens that when the accounting of a company presents an abnormal Cash balance, such fact means that missing from the record are movements of cash outflows - these are facts that will be known by a very specific sector, related to functional practices of a profession - "Balances that it is concluded in a direct and objective manner (...) if the (...) good practices applicable to the movement of the cash account are considered". The majority of Portuguese citizens do not have technical accounting knowledge, nor do they know what a Cash account is.
7- Nevertheless, the definition of "Notorious Fact" is found established in the Code of Civil Procedure, producing effects only in that sphere. This concept is not applicable to tax facts nor does it exist in tax legislation.
8- The first condition for the relevance of accounting is that it exists and is in conditions to justify the movements that it reflects and that affect the patrimony and results of the company.
9- In material terms, accounting encompasses not only the books and records - some of which are mandatory and must comply with certain formalities - but also the supporting documents.
10- The evidentiary value of accounting essentially rests on the respective supporting documents, implying compliance with the rule imposed by n.º 1 and alínea a) of n.º 2 of article 123.º of the Corporate Income Tax Code, according to which "All entries must be supported by supporting documents, dated and capable of being presented whenever necessary".
11- Article 17.º, n.º 3 of the Corporate Income Tax Code also provides that accounting must be organised in accordance with accounting standards and reflect all operations carried out by the taxpayer.
12- Now, in the concrete situation, the inspection procedure was based on the retrospective analysis of the balances shown in the Cash account, the date of the verification of the cash balance having occurred on 9 November 2011.
13- At the time the inspection procedure was initiated, the accounting was recorded up to June 2011.
14- Thus, the movements occurring subsequently (whether entries or exits in "Cash") were analysed, so that the cash balance that existed in the company on the date of 09 November could be ascertained.
15- Thus, in this manner, the necessary elements were gathered, on the basis of which a difference resulted between the value found in the physical count of the "Cash" and its accounting value, as follows:
- Accounting balance of account 11 - cash on 09 November 2011......€ 492,030.85
- Balance of values in "Cash" found with physical count..................... € 1,230.00
- Difference between accounting balance and actual balance............................. € 490,800.85
16- As a result of this procedure it was ascertained that on 09 November 2011 the cash balance was € 492,030.85.
17- "The taxpayer did not present an objective justification for that discrepancy in "Cash". However, confronted with the facts, it was implicitly admitted that the discrepancy was due to cash withdrawals as distribution of profits or advance on account of profits, which were not recorded in the accounting as such. In truth, notwithstanding there being no accounting record of the fact, from the circumstantial analysis carried out, it is concluded that the shareholders came to have ownership of the amounts that previously existed in the "Cash" of the company. It was noted that the company never made loans to the managing shareholders. It was further clarified that the amounts received are deposited in the company account and in personal accounts" - Inspection Report.
18- The fundamental question underlying the complaint, and which is here under discussion, is not the nature of the income as category E income - distribution of profits and advance on account of profits - but rather the moment when it was taxed.
19- The appellant argues that there was successive distribution of results since 2006, having made no record in the accounting nor made payment of tax, and therefore proposes taxation of results distributed in the last four years, arguing that the right to assess results distributed previously.
20- And, to prove the "deliveries" that the shareholders monthly deposited in their personal bank accounts over the years, the appellant attached bank statements of the shareholders' personal accounts and made itself available to present copies of the checks deposited therein, thus reiterating the arguments invoked and already extensively analysed in the context of the gracious complaint procedure.
21- The Tax Inspection, as to the moment of the distribution of profits to the shareholders, concluded, and correctly so, that the amounts were moved in the year 2011.
22- In fact, in all years subject to analysis, the cash showed quite high balances (as demonstrated in the Inspection Report), such that the discrepancy found – which reflects the non-existence of the values in cash – leads to the conclusion that the balances that were declared and accumulated over the years were moved inequivocally in November 2011.
23- Possessing the appellant company organised accounting, this persisted in the recording of high cash balances over the years.
24- And the verification that the cash balance no longer existed in the company only occurred on the day when the verification of the Cash balance was carried out in the context of the inspection action, that is, on 10 November 2011, the date on which the tax fact is considered to have occurred. Until this date, all prerequisites are met to consider the accounting as true and made in good faith, that is, that the accounting balance existing on 9 November 2011 corresponded to the actual balance on the same date.
4. Opinion
Thus, and considering that the grounds of this Hierarchical Appeal in no way alter the direction of the decision given, we are of the opinion that there are no reasons to revoke the appealed act, and the records should be remitted upward.
- The banking documentation contained in documents nos. 5 to 7 attached with the request for arbitral pronouncement, whose content is hereby reproduced, relates to an account in the name of B… and C… (document no. 4 attached with the request for arbitral pronouncement, whose content is hereby reproduced);
- The Claimant recorded the values generated by its activity in the "Cash" account, with which it paid its liabilities, increasing and decreasing the "Cash" balance accordingly;
- At the end of the financial years 2007, 2008, 2009, 2010 and 2011, in the financial statements presented by the Claimant, cash balances were reported of € 316,985.01, € 374,819.05, € 425,331.80, € 488,225.14 and € 511,288.08, respectively (document no. 9 attached with the request for arbitral pronouncement, whose content is hereby reproduced and pages 9 and 14 of the Tax Inspection Report);
- In minutes of meetings of the general assembly of the Claimant dated 31 March of the years 2007 to 2011, the distribution of results to shareholders of the Claimant relating to the years 2006 to 2010 is mentioned, which were not reflected in the accounting (pages 17, 22 and 23 of the Tax Inspection Report);
- In point 3 of the minutes dated 31-03-2007, the distribution to shareholders, in proportion to their shares, of the net result ascertained in the 2006 financial year, as well as of all retained results, not distributed by previous general assembly resolutions, is mentioned (page 22 of the Tax Inspection Report);
- Minutes nos. 18, 19, 20 and 21 of meetings of the general assembly of the Claimant refer to the approval of accounts for the years 2007, 2008, 2009 and 2010, decisions to the effect of distributing to shareholders the net result ascertained in the respective financial year (page 23 of the Tax Inspection Report);
- The amounts not found in "Cash" were affected to the shareholders as title to profits or advance on account of profits, not recorded in the accounting (page 25 of the Tax Inspection Report);
- No entries were made in the shareholders' accounts relating to the amounts referred to;
- The amounts distributed to shareholders were not deposited in the Claimant's bank account, being delivered to shareholders in cash and checks which they deposited in the said account of F…;
- In March 2012, in the course of the inspection procedure, the Claimant proceeded to assess the withholding tax, through the submission of three withholding tax declarations with code 108 — Personal Income Tax - Capital - Other Income, as well as the respective payment, in the periods and amounts detailed below:
[Table showing withholding tax assessments for December 2008, December 2009, and November 2010]
(page 21 of the Tax Inspection Report);
- On 20-03-2017, the Claimant presented the request for arbitral pronouncement that gave rise to this proceeding.
2.2. Facts Not Proved and Substantiation of the Decision on the Factual Matter
The proved facts are based on the documents attached by the Claimant with the request for arbitral pronouncement and on the administrative file.
The banking documents presented by the Claimant as documents nos. 4 to 7 attached with the request for arbitral pronouncement allow concluding that in the years 2005 to 2007 banking transactions were carried out in an account of F… in the name of shareholders B… and C…, namely deposits of values and in cash.
It was not proved that the amount of € 490,800.85 corresponding to the difference between the accounting balance recorded in account 11 – cash on 09-11-2011 and the actual balance found in the inspection action, was placed at the disposal of the shareholders of the Claimant in 2011.
The banking documentation presented by the Claimant relating to banking transactions in the account of shareholders B… and C… in F…, combined with the general assembly resolutions of the Claimant held in the years 2007 to 2010 in which reference is made to distribution to shareholders of the net results of prior years and the lack of the amount in "Cash" that was ascertained to exist in 2011, lead to the conclusion that such distribution occurred in years prior to 2011, without such distribution having been recorded in the accounting.
3. MATTERS OF LAW
3.1. Defect of Error as to the Factual Premises
Article 5.º, n.ºs 1 and 2, alínea h) of the Personal Income Tax Code considers as capital income "the profits of entities subject to Corporate Income Tax placed at the disposal of the respective associates or holders, including advances on account of profits, with the exception of those referred to in article 20.º".
In n.º 1 and in sub-alínea 2) of alínea a) of n.º 3 of article 7.º of the same Code it results that the income referred to is subject to taxation from the moment it is placed at the disposal of its holder.
For this reason, it is at this moment that the tax fact is considered verified, and not when the Tax Authority and Customs Service has or should have knowledge that it occurred.
Indeed, the Tax Authority and Customs Service has inspection means to ascertain tax facts even when declarative obligations are not complied with, and thus has the duty to endeavour to verify in time to carry out assessments relating to facts not declared, if so applicable, being that for those cases of deficiency in compliance with declarative obligations that the admissibility of assessment within the period of 4 years (or more) can be justified and not in the normal periods provided for cases where assessments are based on declarations. Indeed, in the case at hand, through the Financial Statements submitted it was ascertainable that there was a cash balance abnormally high for the volume of business of the Claimant, which could have justified an inspection action much earlier than the year 2011. In truth, "at the origin of the procedure is the fact that an abnormally high cash balance was identified in successive years" (as is referred to on page 5 of the Tax Inspection Report), such that already before the Tax Authority and Customs Service could have noticed that abnormality and proceeded with external inspection or, at least, requested clarification from the Claimant.
The presumption of veracity of the declarations and accounting of the Claimant, established in article 75.º, n.º 1, of the General Tax Law is removed, under alínea a) of its n.º 2, when it results with evidence from proof produced that the books are not duly organised, in particular with all the entries that should have been made and respective supporting documents, as required by article 123.º, n.ºs 1 and 2, alínea a) of the Corporate Income Tax Code.
In any case, in the case at hand, it results from proof produced that the revenues generated by the activity of the Claimant were affected to its liabilities and, in the remaining part, placed at the disposal of the shareholders, including in years prior to 2008, as seen from the bank statements attached with the request for arbitral pronouncement.
For this reason, with respect to income that was placed at the disposal of shareholders in years prior to 2011, it was in the years in which such placing occurred and the income became subject to taxation, with the Claimant having the obligation to carry out withholding tax, on a final basis, under article 71.º, n.º 1, alínea c), of the Personal Income Tax Code.
Thus, immediately, it is concluded that the assessment impugned suffers from a defect of violation of law by error as to the factual premises, by holding that the placing of the amounts corresponding to the cash balance verified in 2011, occurred only on 10-11-2011.
Error as to the factual premises constitutes a defect of violation of law, which justifies the annulment of the assessment, in accordance with the provision in article 163.º, n.º 1, of the Code of Administrative Procedure, subsidiarily applicable under article 2.º, alínea c), of the General Tax Law.
3.2. Expiration of the Right to Assess
In the course of the inspection action the Claimant proceeded to assess the withholding tax, through the submission of three withholding tax declarations with code 108 — Personal Income Tax - Capital - Other Income, as well as the respective payment, with respect to taxable values of € 57,833.00 (relating to 2008), € 50,514.00 (relating to 2009) and € 53,205.58 (relating to 2010), corresponding to increases in the cash balance of each of those years (page 22 of the Tax Inspection Report).
Having concluded that the profits or advances on account of profits were placed at the disposal of shareholders in the years in which they were generated, the income relating to years prior to 2008, reflected in the cash balance of € 316,985.01 that existed at the end of 2007, would have been obtained in years prior to 2008, in that sense pointing to the proof produced.
The Claimant raises the question of whether, with respect to that income to which corresponds the cash balance of € 316,985.01, generated before 2008, the expiration of the right to assess had or had not occurred, in the year 2012, when the impugned assessment was made.
The general period of expiration of the right to assess is 4 years, under article 45.º, n.º 1, of the General Tax Law.
This period is counted, in income taxes, when taxation is carried out by withholding tax on a final basis, from the beginning of the following civil year to that in which the tax fact occurred (article 45.º, n.º 4, of the General Tax Law).
In light of this special rule on the commencement of the expiration period when taxation is to be carried out through final withholding tax, the thesis defended by the Tax Authority and Customs Service cannot be accepted, for want of legal support, that this period only commences with the knowledge by the Tax Authority and Customs Service of the occurrence of the tax fact.
Indeed, this thesis is not even generally defensible in the context of income taxes, as the commencement of the expiration period occurs at the beginning of the civil year following that in which the tax fact occurred, despite the obligations to present declarations intended to provide the Tax Authority and Customs Service with knowledge of those facts being only to be complied with subsequently (articles 120.º of the Corporate Income Tax Code and 60.º of the Personal Income Tax Code).
The expiration period is suspended during the external inspection action, provided its duration does not exceed 6 months (article 46.º, n.º 1, of the General Tax Law), but, in the case at hand, the inspection action lasted more than 6 months (between 10-11-2011 and 15-06-2012), and therefore there is no suspension of the expiration of the right to assess to be considered.
Thus, with respect to the income underlying the cash balance that existed at the end of 2007, the expiration period for the right to assess commenced, at the very least, on 01-01-2008 (on earlier dates with respect to income from years prior to 2007), such that the expiration of the right to assess occurred, at the very least, at the end of the 4th year following the year in which the placing at disposal occurred, that is, on 31-12-2011.
For this reason, in 2012, when the assessment was made, the expiration period for the right to assess had already fully elapsed.
The non-implementation of the assessment within the expiration period constitutes a defect of violation of law that justifies its annulment, under article 163.º, n.º 1, of the Code of Administrative Procedure, subsidiarily applicable under article 2.º, alínea c), of the General Tax Law.
4. DECISION
Accordingly, the arbitrators agree in:
- Finding the request for arbitral pronouncement well-founded;
- Annulling the withholding tax assessment no. 2012…, in the amount of € 72,413.58 and compensatory interest assessment no. 2012…, in the amount of € 1,610.95.
5. VALUE OF THE PROCEEDINGS
In accordance with the provision of article 305.º, n.º 2, of the Code of Civil Procedure and article 97.º-A, n.º 1, alínea a), of the Code of Tax Procedure and article 3.º, n.º 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at € 74,024.53.
6. COSTS
Under article 22.º, n.º 4, of RJAT, the costs are fixed in the amount of € 2,448.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Tax Authority and Customs Service.
Lisbon, 14-11-2017
The Arbitrators
(Jorge Lopes de Sousa)
(Pedro Miguel Bastos Rosado)
(Hugo Daniel Ferreira Leite Henriques)
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