Process: 183/2016-T

Date: November 30, 2016

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD Decision 183/2016-T addresses the Arbitral Tribunal's jurisdiction to hear IRS (Personal Income Tax) disputes concerning professional income classification under Article 2 of the RJAT (Legal Regime for Tax Arbitration). The case involved married taxpayers challenging a 2014 IRS assessment of €11,164.33, disputing whether their administrative services income should be taxed under the 0.75 coefficient (applicable to activities listed in Article 151 of the IRS Code) or the 0.10 coefficient under Article 31(2)(e) for other professional services. The Tax Authority sought to reclassify income from field 443 to field 440 in Annex B, significantly increasing the tax burden. The single-arbitrator tribunal was constituted on 28 June 2016 following appointment by the Deontological Council, as the claimants did not designate their own arbitrator. The Tax Authority raised a preliminary objection (exceção) regarding the tribunal's competence to decide IRS professional income matters. Following proper notification and the claimants' response, the tribunal ruled on 30 September 2016 that the jurisdictional exception would be decided in the final judgment. The tribunal dispensed with the oral hearing under Article 18 of RJAT, finding sufficient elements in the case file for decision. This case establishes important precedent on CAAD's material jurisdiction over IRS professional income disputes, the interpretation of coefficient applicability under the simplified regime (Article 31 IRS Code), and procedural safeguards including the right to prior hearing (Article 60 LGT). The decision confirms that taxpayers may challenge IRS assessments involving professional income classification through tax arbitration, provided jurisdictional requirements are met.

Full Decision

ARBITRAL DECISION

I. REPORT

A - PARTIES AND CONSTITUTION OF THE ARBITRAL TRIBUNAL

A... and B..., married under the community of acquired property regime, taxpayer numbers ... and ..., respectively, with residence at Street ..., no..., ..., ...-..., in ..., hereinafter designated as "Claimants",

TAX AND CUSTOMS AUTHORITY, hereinafter designated as Respondent or AT.

The request for constitution of the Arbitral Tribunal was accepted by His Excellency the President of CAAD and the Arbitral Tribunal was regularly constituted, on the 28th of June 2016, to hear and decide on the subject matter of the present proceedings, as appears from the respective minutes.

The Claimants did not appoint an arbitrator, whereby, under the provisions of Article 6(1) and Article 11(1)(b) of Decree-Law No. 10/2011, of 20 January, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council designated the undersigned, the appointment having been accepted in the legally prescribed terms.

The parties were duly notified of such designation and did not manifest their unwillingness to refuse it, in accordance with Article 11(1)(a) and (b) of RJAT and Articles 6 and 7 of the Deontological Code.

In accordance with the provision in Article 11(1)(c) of Decree-Law No. 10/2011, of 20 January, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the sole arbitral tribunal was regularly constituted on 28 June 2016, and subsequently an arbitral order was issued notifying the AT to submit its response within the legal deadline, in accordance with the terms and for the purposes provided for in Articles 17(1) and (2) of RJAT.

On 16 September 2016, following the submission of an exception to the AT's Response, an arbitral order was issued notifying the Claimants to, within a period of ten days, comment on the raised exception, which they did on 26 September 2016.

On 30 September 2016, an arbitral order was issued, whereby it was stipulated that the raised exception would be decided in the final judgment and, there being no need for the production of additional evidence beyond that which was already incorporated in the case file and, finding no necessity for the parties to correct their procedural documents, the proceedings containing all the necessary elements for the rendering of judgment, for reasons of procedural economy and expedition, the prohibition of useless acts, the Tribunal deemed it appropriate to dispense with the holding of the meeting referred to in Article 18 of RJAT, as well as the submission of arguments.

Neither of the parties manifested any disagreement with the Tribunal's position, whereby the meeting referred to in Article 18 of RJAT was not held, nor did the parties submit arguments.

B – REQUEST

The Claimants filed the present request for arbitral pronouncement claiming the illegality of the assessments in the area of Personal Income Tax, relating to the year 2014, with the other legal consequences, as appears from the documents attached to the arbitral request, which are:

  • Assessment No. 2016..., relating to the Personal Income Tax assessment for the year 2014;

  • Assessment No. 2016..., relating to the statement of compensatory interest calculation;

  • Notification No. 2016..., relating to the statement of account reconciliation,

which established a total tax due of €11,164.33 (eleven thousand one hundred and sixty-four euros and thirty-three cents).

The tax assessments challenged relate to the year 2014, and the Claimants were notified, on 15 February 2016, of the content of the Assessment Statement and to proceed with the voluntary payment of the amount of €11,164.33 (eleven thousand one hundred and sixty-four euros and thirty-three cents) by 16 March 2016.

C – CAUSE OF ACTION

To substantiate their request for arbitral pronouncement, the Claimants alleged, with a view to the declaration of illegality of the tax assessment acts in the area of Personal Income Tax, in summary, the following:

  1. The assessment act in question is manifestly illegal due to an error in the factual and legal assumptions, which originates from the incorrect qualification of their status as taxpayers, whereby its annulment should be declared.

  2. The Claimants submitted, on 27 May 2015, the declaration of Model 3 of Personal Income Tax, relating to the fiscal year 2014, to which they attached a copy of invoice .../12, in which appears the description of "Administrative services/Collections and credit assessment and undifferentiated administrative work/Month of Dec 2014".

  3. Following this submission, assessment note No. 2015... was issued, which calculated the amount of €20,237.42 (twenty thousand two hundred and thirty-seven euros and forty-two cents).

  4. On 23 October 2015, the Claimants were notified, by registered letter that, in the course of the analysis of the Personal Income Tax declaration submitted, they should replace the Personal Income Tax declaration, changing field 443 of table 4A of Annex B to field 440 of the same Annex, calculating a new amount of €11,164.33 (eleven thousand one hundred and sixty-four euros and thirty-three cents), which adds to the €20,237.42 (twenty thousand two hundred and thirty-seven euros and forty-two cents) already assessed.

  5. As they did not agree with the substitution, the Claimants did not do so voluntarily and were again notified to comment, in the context of the right to prior hearing present in Article 60 of the General Tax Law, on the proposal to replace the entry, of field 443, of the income earned in the amount of €35,000.00, to field 440 of table 4A of Annex B, of their respective Personal Income Tax declaration.

  6. In summary, to substantiate their request, the Claimant alleges that the assessment of Personal Income Tax is illegal and that there should be no replacement of the entry already made since, in accordance with Article 31 of the Personal Income Tax Code, with regard to the simplified regime of business and professional income, the determination of taxable income results from the application of objective indicators of technical-scientific basis for the different sectors of economic activity.

  7. According to the Claimants, the introduction of the expression "specifically" in Article 31(b) of the Personal Income Tax Code clarifies that the application of the coefficient 0.75 is restricted solely and exclusively to the professional activities listed in the table referred to in Article 151 of the Personal Income Tax Code.

  8. The provision of services in question do not derive from the activities listed in the Table of Article 151 of the Personal Income Tax Code and, therefore, the coefficient to be applied should be 0.10, in accordance with Article 31(2)(e) of the Personal Income Tax Code.

  9. They petition for the annulment of the tax assessments challenged, with reference to the year 2014, on the grounds of legal defect due to error in the legal and factual assumptions, manifested in the non-application of the coefficient of 0.10 referred to in Article 31(2)(e) of the Personal Income Tax Code (in the version prior to the date of the facts) and claim reimbursement of the amounts paid, plus compensatory interest.

  10. The Claimants contend, finally, the voidability of the Personal Income Tax assessment acts, based on the context of the violation of the norms relating to tax interpretation.

  11. On 29 October 2015, the Claimants received Official Letter No. ... from the Tax Service of ..., which notified them to exercise their right to prior hearing and which informed them that they should replace the Personal Income Tax declaration and change the entry of the income mentioned in Annex B, from field 443 to field 440.

  12. On 17 November 2015, the Claimants chose to exercise that right.

  13. The Claimants do not agree with the AT's understanding, reinforcing that the AT itself clearly identified as the object of the present request the challenge of the Personal Income Tax assessment relating to the fiscal year 2014, "the claimants file the present request for arbitral pronouncement against the Personal Income Tax assessment...".

  14. The Claimants react against the act of the assessments themselves.

  15. The Claimants consider that the AT's argumentation suffers from a contradiction as, on the one hand, it recognizes that the request is directly directed at declaring the illegality of the assessment and, on the other hand, it alleges that the Claimants intend to challenge the AT's decision to change the classification of the category B income.

  16. The Claimants argue that the Tribunal's jurisdiction is defined by the request and, accordingly, there is no incompetence vis-à-vis Article 2(1)(a) of RJAT.

D - RESPONSE OF THE RESPONDENT

The Respondent, duly notified for this purpose, timely submitted its response in which, in summary, alleged the following:

17 - It raises the exception of incompetence of the Tribunal ratione materiae and ratione hierarchiae, based on Article 13 of the Code of Administrative Court Procedure, read together with Article 18 of the Tax Procedure Code and Articles 101 and following of the Civil Procedure Code.

18 – The absolute incompetence of the Tribunal may be raised by the parties and must be raised by the Tribunal at any stage of the proceedings, provided that there is no judgment with res judicata. (point 10 of the Response)

19 – The jurisdiction of the Tribunal is determined by the request of the claimant and by the cause of action, expressed in the initial petition, and does not depend on the legitimacy of the parties or on the merits of the action. (point 13 of the Response)

20 – Thus, the act that is the object of the dispute cannot be characterized as an act of determination of the taxable matter that gives rise to the assessment of a tax for the purposes of Article 2(1)(b) of RJAT since what is at issue here is the classification of category B income in field 440 and not in field 443. (points 15 and 16 of the Response)

21 – For the AT, the procedure of "tax classification", being detrimental in relation to the "assessment act" proper, is not to be confused with the act of determination of the taxable matter. (point 19 of the Response)

22 – The request manifests the declaration of error by the AT in the classification of income in field 440 and not in field 443, which, in its interpretation, is not susceptible to resolution by way of arbitration, but rather through a special administrative action, in accordance with Article 97(1)(p) of the Tax Procedure Code and Article 37 et seq. of the Code of Administrative Court Procedure. (points 21 and 22 of the Response)

23 – In its challenge defense, the Respondent invokes that the activities exercised by the Claimant spouse are "Credit collection and assessment activities" CAE ... and "Photocopying execution, document preparation and other specialized administrative support" CAE....

24 – Table 4A is intended for gross income resulting from the exercise of professional, commercial and industrial activities or isolated acts of that nature, as defined in Articles 3 and 4 of the Personal Income Tax Code.

25 – Field 443 is intended for the indication of the remaining income of category B, namely, provision of services which, by virtue of Article 4 of the Personal Income Tax Code, fall within Article 3(1)(a) of the Personal Income Tax Code, that is, it is intended for "income resulting from the exercise of any commercial, industrial, agricultural, forestry or livestock activity."

26 – The AT understands that this is not the situation of Claimant B, since she exercises two service provision activities, provided for in the Classification of Economic Activities.

27- The situation in question falls within field 440, which is intended for the indication of income earned in the exercise, on own account, of any service provision activity that falls within Article 3(1)(b) of the Personal Income Tax Code.

28 – Circular 5/2014 establishes that the coefficient of 0.75, provided for in Article 31(2)(b), applies to service provisions that fall within Article 3(1)(b) of the Personal Income Tax Code.

29 – The right to compensatory interest depends on demonstrating the error of fact and law and, as the AT made the correct application of the law, there can be no talk of error by the services within the terms provided for in Article 43 of the General Tax Law, and therefore there is no right to compensatory interest.

E – PRELIMINARY MATTERS

The Arbitral Tribunal is regularly constituted. It is materially competent, as will be explained below, in accordance with Article 2(1)(a) and Article 30(1) of Decree-Law No. 10/2011, of 20 January.

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

The proceedings do not suffer from any defects that would invalidate them.

II. MATERIAL FACTS

A – PROVEN FACTS

Before entering into the consideration of the disputed issues in the present proceedings, the material facts relevant to their understanding and decision will be presented, based on documentary evidence and taking into account the facts alleged.

The proven facts described above were established as proven on the basis of the documentary evidence submitted by the parties in the present proceedings.

With regard to the material facts, the Tribunal does not have to rule on everything that was alleged by the parties. It is for it, rather, to have the duty to select the facts that matter for the decision and to distinguish between the proven and unproven matter, as provided for in Article 123(2) of the Tax Procedure Code and Article 607(3) of the Civil Procedure Code, applicable by virtue of Article 29(1)(a) and (e) of RJAT.

In this way, the facts pertinent to the judgment of the case were chosen based on their legal relevance, which is established with regard to the various plausible solutions to the legal questions. (See Article 596 of the Civil Procedure Code, applicable by virtue of Article 29(1)(a) and (e) of RJAT).

Thus, taking into account the positions assumed by the parties, the documentary evidence submitted to the case file, the following facts are considered proven, which are moreover consensually acknowledged and accepted by the parties, with relevance to the decision:

  1. The Claimants submitted, on 27 May 2015, the Model 3 Declaration of Personal Income Tax, relating to the fiscal year 2014.

  2. Claimant B filled in, in Annex B, in table 4A, field 443, with the amount of €35,000.00 (thirty-five thousand euros).

  3. Claimant filled in, also in Annex B, in table 1, field 1, relating to the simplified taxation regime and field 3, relating to professional, commercial and industrial income.

  4. Field 10 – "Code of Activity Tables Article 151 of the Personal Income Tax Code" – was not filled in.

  5. This Declaration gave rise to assessment note No. 2015 ... and calculated the amount of €20,237.42 (twenty thousand two hundred and thirty-seven euros and forty-two cents) as tax due.

  6. The Claimants made payment of the assessment in question within the voluntary payment period, on 7 August 2015.

  7. On 23 October 2015, they were notified by the Tax Service of ... to proceed with the replacement of the Model 3 Personal Income Tax Declaration, year 2014, changing field 443 to field 440, which the Claimants did not do.

  8. From the account reconciliation statement, that is, from the document where the second assessment note appears (No. 2016...), resulted in the calculation of a new amount due of €11,164.33 (eleven thousand one hundred and sixty-four euros and thirty-three cents).

  9. The Claimants made payment of the assessment in question within the voluntary payment period, on 29 February 2016.

  10. The Claimants intend, in these proceedings, to annul assessment No. 2016..., relating to the Personal Income Tax assessment for the year 2014 and assessment No. 2016..., relating to the statement of compensatory interest calculation.

B – UNPROVEN FACTS

There are no facts that should be considered as unproven with relevance to the decision in question.

III. APPLICABLE LAW: SUBSTANTIATION OF THE MERITS DECISION

With the material facts established as set out above, it is important to address the legal question raised by the Claimant and, taking into account the positions of the parties assumed in the arguments presented, the central questions to be resolved, which must be considered and decided, are:

A – JURISDICTION OF THE ARBITRAL TRIBUNAL

Among the questions of an exceptional nature susceptible, if accepted, of preventing the tribunal from hearing the merits of the case and resulting in the dismissal of the instance, the question of the tribunal's incompetence logically precedes all others and must, therefore, be decided first (Article 13 of the Code of Procedure in Administrative Courts, applicable by virtue of Article 29(1)(c) of RJAT).

The AT raises, in Articles 7 et seq. of its Response, a defense by exception, arguing the incompetence of the Tribunal ratione materiae and ratione hierarchiae.

The AT argues that "absolute incompetence can be raised by the parties and must be raised by the Tribunal at any stage of the proceedings, as long as there is no judgment with res judicata rendered on the merits of the case and that the scope of tax arbitral jurisdiction is delimited by the provisions of Article 2 of RJAT which, in its paragraph 1, establishes the criteria for material distribution." (points 10 and 11 of the Response)

On the other hand, the Claimants do not agree with the AT's understanding and consider that the Tribunal has jurisdiction, in accordance with Article 2 of RJAT, reinforcing that the AT itself clearly identified as the object of the present request the challenge of the Personal Income Tax assessment relating to the fiscal year 2014, "the claimants file the present request for arbitral pronouncement against the Personal Income Tax assessment...".

The Claimants consider that the AT's argumentation suffers from a contradiction as, on the one hand, it recognizes that the request is directly directed at declaring the illegality of the assessment and, on the other hand, it alleges that the Claimants intend to challenge the AT's decision to change the classification of category B income.

Let us see,

Jurisdiction appears as an elementary procedural requirement. As Menezes Cordeiro states,[1] "A minimum of consistency in the administration of justice requires that Arbitral Tribunals occupy themselves with the matter that falls within their competence. On the positive side, they cannot refuse cases which fall within their competence or there would be a denial of justice. On the negative side, they should not accept matters that belong to other courts."

The jurisdiction of the Arbitral Tribunal should be viewed from the substantive point of view. "The arbitral tribunal does not have hierarchy relative to any court, has no appellate jurisdiction nor territorial competence. Therefore, the arbitrator's jurisdiction is defined and delimited by two aspects: the arbitration agreements and the law."[2] The arbitration agreement defines the specific, current dispute and the law admits or not the arbitration of a dispute.

In either case, whether because it does not fall within the object of the arbitration agreement, or because the law does not allow the arbitration of the dispute, the consequence is the incompetence of the Arbitral Tribunal to hear the dispute. In fact, if there are matters in which the criterion for attributing non-arbitrability can be based on reasons of legislative policy without conflicting with the public interest, there are others in which this is not the case, such as those relating to indisposable patrimonial rights or certain labor rights, being their sentence null.

"The arbitrator's jurisdiction is exercised in relation to two moments and matters"[3]: In a prior moment, in which the arbitrator examines the existence and validity of the arbitration agreement. If it concludes on the existence and validity, the arbitrator's jurisdiction is then exercised by him in a second moment and regarding the other conditions on which the determination of its powers to resolve the dispute depends.

Let us begin with the principle of competence-competence. "It is the power of arbitral tribunals to decide their own jurisdiction with binding general force."[4] This principle is related to the principle of autonomy of arbitration agreements, but the two are not to be confused. "The arbitrator has the power to decide whether or not it has jurisdiction (principle of competence-competence) and can declare itself competent even if the main legal relationship is null or has ceased (principle of autonomy)."[5]

As Manuel Barrocas states,[6] "The consideration of the matter of the arbitral tribunal's jurisdiction therefore concerns: -The existence of an arbitration agreement; - Capacity of the parties to enter into an arbitration agreement; - Arbitrability of the dispute; - Form of the arbitration agreement; -Lawfulness of the object; -Inclusion of the dispute within the object; -Constitution of the arbitral tribunal."

The scope of tax arbitral jurisdiction is delimited, in the first place, by the provisions of Article 2 of RJAT which sets out, in its paragraph 1, the criteria for material distribution.

Thus, in accordance with Article 2 of RJAT, the jurisdiction of this "type" of tribunals, arbitral tribunals, would be to consider the pretensions of taxpayers, relating to:

  • The declaration of illegality of tax acts (assessment, self-assessment, withholding tax and payments on account) – Article 2(1)(a);
  • The declaration of illegality of acts determining the taxable matter when it does not give rise to the assessment of any tax, of determining the taxable base and of fixing patrimonial values – Article 2(1)(b);

In order to verify the Tribunal's jurisdiction, it is necessary to know which tax administrative act is the object of the arbitral proceedings or whose declaration of illegality the Claimants seek.

The AT considers that "in the case under consideration, the act that is the object of the dispute cannot be characterized as an act of determination of the taxable matter that gives rise to the assessment of a tax for the purposes of paragraph b) of Article 2(1) of RJAT. What is at issue here is the classification of category B income in field 440 and not in field 443 (...)" (points 15 and 16 of the Response)

"The jurisdiction of the arbitration courts operating under the Centre for Administrative Arbitration (CAAD) is expressly defined by the LRTA and is legally limited, in the first place, to the matters set out in Article 2(1). Thus, in this article, tax arbitration courts have subject matter jurisdiction to decide on "a) the declaration of the illegality of tax assessments, self-assessments, tax withholdings and payments on account; b) the declaration of the illegality of acts determining the tax base when it does not give rise to the assessment of any tax, of acts determining the tax base and of acts defining property values. (...)

It is worth mentioning that although paragraphs a) and b) of Article 2 of the LRTA use the phrase "declaration of the illegality" to define the jurisdiction of the arbitration courts operating under the CAAD and do not refer to the adjudicatory decisions, arbitration courts have been considering that their jurisdiction includes the same powers assigned to tax courts in the process of judicial review." [7] [8]

It is considered that the thesis defended by the AT cannot succeed. The AT argues that "The act reviewed does not fall within the potential list of acts determining taxable matter or taxable base to the extent that it does not apply a set of objective or subjective factors that would lead to the assessment of the corresponding tax, being located, rather, "upstream" of the determination of the taxable matter." (point 17 of the Response)

For the AT, "the request merely manifests the declaration of error by the Tax Administration in the classification of income in field 440 and not in field 443, which, given the matter to be reviewed, is not susceptible to resolution by way of arbitration (...) but rather by special administrative action (paragraph p), of Article 97(1) of the Tax Procedure Code and Article 37 et seq. of the Code of Administrative Court Procedure." (points 20 and 21 of the Response)

As Paula Rosado Pereira states, "Arbitration courts have the power to decide claims relating to declaration of illegality of tax assessment. Tax assessment is the administrative act by which AT carries out an assessment of taxes due and may be one of three types, namely: Administrative assessment, ex officio assessment and additional assessment."[9] The author continues, referring to the last concept, "this type of assessment takes place of the other administrative assessment acts when the amount initially determined by simple administrative assessment is incorrect."[10] [11]

Now, in the present proceedings, a request is made for a declaration of illegality of an act determining the taxable matter which results, in the first place, in a taxable base with a different value and, consequently, the assessment of a tax with a different value. It is true that the origin of the different value of the tax is the classification of income in field 440 or 443, but the completion of each of them has, as a consequence, a different tax and with a different value.

Even if this were not the case and, by mere academic argument it were admitted, without granting, that one were not certain of the thesis defended, which one is, "beyond the situations in which the impugnability of the act is expressly provided for in law, it is still to be admitted the challenge in cases of those acts which, even if not being final acts of the procedure, prove to be immediately injurious to the legal sphere of the individual. More than a practical necessity, this provision stems essentially from the constitutional imperative resulting from Article 268(4) of the Constitution."[12]

In terms of the scope of legislative authorization, it was established that the legal regime of tax arbitration comprises the delimitation of the object of the tax arbitral proceedings, "which may include acts of assessment of taxes, including self-assessments, withholding tax and payments on account, acts determining the taxable matter, when they do not give rise to assessment, acts of rejection of gracious objections or requests for review of tax acts, administrative acts which involve the consideration of the legality of assessment acts, acts defining patrimonial values and rights or legitimate interests in tax matters. Moreover, the definition of the grounds of the tax arbitral proceedings includes illegality or injury or risk of injury to rights or legitimate interests."[13]

Thus, there is no doubt that the Tribunal has jurisdiction, whereby the exception raised by the Respondent should be considered unfounded.

B – SUBSTANTIATION IN LAW

The substantive question at issue in the present proceedings is to determine which of the fields provided for in table 4A of Annex B should be filled in by Claimant B and, consequently, to determine which of the coefficients provided for in Article 31(2) should be applied to the income obtained by Claimant from the provision of services in the activities with the CAE "Credit collection and assessment activities – CAE..." and "Photocopying execution, document preparation and other specialized administrative support - CAE...".

The Model 3 Declaration relating to the fiscal year 2014 was filled in and submitted by the Claimants who, inter alia, filled in Annex B. In that Annex B, they declared, in table 4A, "category B income not included in the preceding fields", in the amount of €35,000.00.

In the year 2014, the wording of Article 31 of the Personal Income Tax Code was as follows:[14]

"1- The determination of taxable income results from the application of objective indicators of technical-scientific basis for the different sectors of economic activity.

2- Until approval of the indicators mentioned in the preceding paragraph, or in their absence, taxable income is obtained by adding to the income resulting from the provision of services provided by the partner to a company covered by the tax transparency regime, in accordance with paragraph b) of Article 6(1) of the Corporate Income Tax Code, the amount resulting from the application of the following coefficients:

a) 0.15 of the sales of merchandise and products, as well as to the provision of services carried out in the context of hotel and similar activities, catering and beverages;

b) 0.75 of the income from professional activities listed in the table referred to in Article 151:

c) 0.95 to income from contracts which have as their object the transfer or temporary use of intellectual or industrial property or the provision of information regarding experience acquired in the industrial, commercial or scientific sector, income from capital attributable to activities generating business and professional income, to the positive result of property income to the positive balance of gains and losses and other patrimonial increases;

d) 0.30 to subsidies or subventions not intended for exploitation;

e) 0.10 to subsidies intended for exploitation and remaining income of category B not provided for in the preceding paragraphs."

The declaration of the amount of €35,000.00 (thirty-five thousand euros) in field 443 automatically determined the application to it of the coefficient of 0.10 for the purposes of calculating taxable income.

The Claimants allege that paragraph b) in question and which leads to the application of a coefficient of 0.75, can only be applied to the activities expressly indicated in Article 151 and its respective table. In accordance with which the activities carried out by the Personal Income Tax subjects are classified for the purposes of this tax and, also, in accordance with the Classification of Portuguese Economic Activities by Activity Branch (CAE), of the National Institute of Statistics, or in accordance with the codes mentioned in a table of activities approved by ordinance of the Minister of Finance.

In the interpretation of the Claimants, this classification of activities is exhaustive in nature and only the activities listed in the table can be included in the context of paragraph b) of Article 31(2) of the Personal Income Tax Code. Thus, the Claimants seek to have the assessment in question annulled with regard to the taxable income obtained by the application of the coefficient of 0.75 to the value declared of the provision of services performed in the year in question.

It is therefore a question of interpreting the norm provided for in the legal statement contained in paragraph b) of Article 31(2) of the Personal Income Tax Code in effect in the year 2014 in order, in this way, to determine whether the income from the provision of services obtained in the year 2014 by Claimant B falls, or not, within its scope of application.

On the fundamental question at issue, it is to be said that the first limit of interpretation is the letter of the law. "The determination of taxable income results from the application of objective indicators of technical-scientific basis for the different sectors of economic activity."[15]

According to the general rule of Article 31(2) of the Personal Income Tax Code (in the version given by Law No. 83-C/2013, of 31 December, effective on 1 January 2014), as regards the provision of services, taxable income is that resulting from the application of the coefficient of 0.75, when it derives from professional activities listed in the table referred to in Article 151 of the Personal Income Tax Code and 0.10 to remaining income from category B (paragraphs b) and e) of Article 31(2) of the Personal Income Tax Code).

But the literal element is not the only one to be taken into account. The interpretive task demands other elements, that is, from the text of the norm, one must discover the underlying ratio legis, "a task of interconnection and valuation that escapes the literal domain".[16]

On the interpretation of tax norms in general and for the case at hand, Article 11 of the General Tax Law establishes essential rules for the interpretation of tax laws:

"Article 11 - Interpretation

1 - In determining the meaning of tax norms and in qualifying the facts to which they apply, the general rules and principles of interpretation and application of laws are observed.

2- Whenever, in tax norms, terms specific to other branches of law are used, they must be interpreted in the same sense that they have there, unless otherwise directly appears from the law.

3 - If doubt persists about the meaning of the tax rules to apply, account must be taken of the economic substance of the tax facts. (Emphasis ours)

4 - Gaps resulting from tax norms covered by the reserve of law of the Assembly of the Republic are not susceptible to analogue integration."

We consider that the delimitation of the scope of the rule of incidence of this tax must follow the orientation of the letter, spirit and purpose of the law! Now, using the various elements of interpretation, one reaches the conclusion that the coefficient of 0.75 is applicable to income from professional activities listed in the table referred to in Article 151.

The table of activities referred to in Article 151, approved by Ordinance 1011/2001, of 21 August, includes, in paragraph 15, "Other activities exclusively of provision of services", which includes the code ... referring to "Other service providers".

Circular 5/2014 contains an interpretation with which we agree and clarifies that "Field 440 is intended for the indication of income earned in the exercise, on own account, of any service provision activity that had classification in paragraph b) of Article 3 of the Personal Income Tax Code, regardless of whether the activity exercised is classified in accordance with the Portuguese Classification of Economic Activities (CAE) of the National Institute of Statistics, or in accordance with the codes mentioned in the table of activities approved by Ordinance No. 1011/2001, of 21 August, including the activity with the code ... – Other service providers." (Emphasis ours)

It is then necessary to assess which service provisions fall within Article 3 of the Personal Income Tax Code. Category B, in particular Article 3, encompasses income from independent work and when earned on own account in the exercise of activities of a scientific, artistic or technical nature.

It establishes, for what matters to us, Article 3:

"Article 3 - Income of category B

1 – Business and professional income comprises:

a) that resulting from the exercise of any commercial, industrial, agricultural, forestry or livestock activity;

b) that earned in the exercise, on own account, of any activity of provision of services, including those of a scientific, artistic or technical character, whatever their nature, even if connected with activities mentioned in the preceding paragraph;

c) that coming from intellectual or industrial property or from the provision of information regarding experience acquired in the industrial, commercial or scientific sector, when earned by its original holder.

2 – Income of this category also comprises:

a) property income attributable to activities generating business and professional income;

b) capital income attributable to activities generating business and professional income;

c) gains realized in the context of activities generating business and professional income, defined in accordance with Article 46 of the Corporate Income Tax Code, particularly those resulting from the transfer to the personal patrimony of entrepreneurs of any property affected by the company's assets and, as well as, other gains or losses which, not being in these conditions, result from the operations referred to in Article 10(1), when attributable to activities generating business and professional income;

d) sums received as indemnification, connected with the activity carried out, particularly its reduction, suspension and cessation, as well as by the change in the location of its exercise;

e) sums relating to the temporary transfer of exploitation of an establishment;

f) subsidies or subventions in the context of the exercise of activity covered in paragraph a) of Item 1;

g) subsidies or subventions in the context of the exercise of activity covered in paragraph b) of Item 1;

h) that resulting from isolated acts relating to activity covered in paragraph a) of Item 1;

i) that resulting from isolated acts relating to activity covered in paragraph b) of Item 1.

3 – For the purposes of paragraphs h) and i) of the preceding item, income resulting from isolated acts is that which does not result from a foreseeable or repeated practice.

4 – Income resulting from agricultural, forestry and livestock activities is excluded from taxation when the value of receipts or revenues, individually or in combination with net income subject to, even if exempt, this or other categories that must be or have been combined, does not exceed per family unit four and a half times the annual value of the IAS. (...)"

As for the concept of independent work, it can be argued that any activity of a scientific, artistic or technical character, which is exercised in a remunerated manner without dependence on a employing entity or without employees or collaborators, falls under the provision of Article 3.

With regard to the service provision contract, this is one in which one of the parties undertakes to provide to the other a certain result of its intellectual or manual work, with or without remuneration, as provided in Article 1154 of the Civil Code.

The activities of "Credit collection and assessment activities" CAE ... and "Photocopying execution, document preparation and other specialized administrative support" CAE ... exercised by Claimant B are not specifically named in the activities expressly listed in the table but contain all the characteristics of income covered by Article 3 of the Personal Income Tax Code and can be considered as provision of services covered by the code ... .

Thus, the Respondent is correct when it states that "whenever the activity carried out is listed in the table of Article 151 or is listed in the Classification of Economic Activities list, the income should be registered in field 440, as set out in the description of that field." (point 43 of the Response)

Field 443, according to Circular 5/2014, "is intended for the indication of the remaining income of category B, namely, provision of services which, by virtue of Article 4 of the Personal Income Tax Code, fall within paragraph a) of Article 3(1) of the aforementioned code, provided that they are not provided for in paragraphs a) and d) and the first part of paragraph e) of Article 31(2) of this code and, thus, are not included in the preceding fields of this table."

Article 4 provides:

"Article 4 - Commercial and industrial, agricultural, forestry and livestock activities

1 - Commercial and industrial activities, namely, the following:

a) Purchase and sale;

b) Manufacture;

c) Fishing;

d) Mining operations and other extractive industries;

e) Transport;

f) Civil construction;

g) Urban development and exploitation of housing developments;

h) Hotel and similar activities, catering and beverages, as well as sale or exploitation of periodic housing property rights;

i) Travel and tourism agencies;

j) Crafts;

l) Agricultural and livestock activities not connected with the exploitation of land or in which the latter has a manifestly ancillary character;

m) Agricultural, forestry and livestock activities integrated in other activities of a commercial or industrial nature."

As it appears, Claimant B does not exercise any of these activities. It is therefore not seen how it is possible to include within the scope of field 443 the income from the activities exercised by Claimant B, nor is it seen how they can be included in the "remaining income of category B that is not provided for in the preceding paragraphs." The activities carried out by Claimant B do not fall within field 443 and only to these applies the coefficient of 0.10.

In this way, the €35,000.00 (thirty-five thousand euros) that the Claimants registered in field 443 should be included in field 440 to which the coefficient of 0.75 should be applied.

For this reason, the arbitral request should be judged unfounded and the tax acts which are the object of the present proceedings should be upheld.

IV. COMPENSATORY INTEREST

The right to compensatory interest depends on "payment of tax debt in an amount greater than that legally due" (Article 43(1) of the General Tax Law), whereby, there being no tax to be refunded, the consideration of the request for payment of compensatory interest is prejudiced.

V. DECISION

Being of this Tribunal Singular the following:

a) To judge the arbitral request unfounded and, in consequence, to uphold the tax acts which are the object of the present proceedings.

b) To condemn the Claimants to the costs of proceedings, in the amount of €918.00 (nine hundred and eighteen euros).

Value of the Proceedings

In accordance with the provisions of Article 315(2) of the Civil Procedure Code, paragraph a) of Article 97-A(1) of the Tax Procedure Code and also of Article 3(2) of the Regulations on Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at €11,164.33 (eleven thousand one hundred and sixty-four euros and thirty-three cents).

Costs

For the purposes of the provisions of Article 12(2) and Article 22(4) of RJAT and Article 4(4) of the Regulations on Costs in Tax Arbitration Proceedings, the amount of the costs is fixed at €918.00 (nine hundred and eighteen euros), in accordance with Table I attached to said Regulations, to be borne entirely by the Claimants.

Notify.

Lisbon, 30 November 2016

The Arbitrator

(Jorge Carita)

Text prepared by computer in accordance with the provisions of Article 138(5) of the Civil Procedure Code, applicable by reference in Article 29 of RJAT.

The wording of this decision is governed by the orthography prior to the Orthographic Agreement of 1990.

Frequently Asked Questions

Automatically Created

What is the scope of the Arbitral Tribunal's jurisdiction over IRS (personal income tax) disputes under Article 2 of the RJAT?
Under Article 2 of the RJAT (Decree-Law 10/2011), the Arbitral Tribunal has jurisdiction to hear disputes concerning the legality of tax acts, including IRS assessments. However, jurisdictional competence depends on the specific nature of the dispute. In Decision 183/2016-T, the Tax Authority raised a preliminary exception questioning whether professional income classification disputes fall within CAAD's material jurisdiction. The tribunal's competence extends to reviewing IRS assessments for legal errors, including incorrect application of tax coefficients under Article 31 of the IRS Code, provided the challenge concerns the legality of administrative acts rather than purely interpretative matters reserved for general courts.
Can taxpayers challenge IRS assessments on professional income (rendimentos profissionais) through tax arbitration at CAAD?
Yes, taxpayers can challenge IRS assessments on professional income (rendimentos profissionais) through CAAD tax arbitration. Decision 183/2016-T confirms this competence, though the Tax Authority initially raised a jurisdictional objection. The case involved disputing the classification of administrative services income and whether the 0.75 coefficient (for activities in Article 151's table) or the 0.10 coefficient (Article 31(2)(e)) should apply. Taxpayers must demonstrate that the assessment contains legal or factual errors in applying IRS Code provisions. Challenges to professional income assessments under the simplified regime are admissible when they concern the legality of coefficient application, income classification, or violation of procedural guarantees like the right to prior hearing.
What procedural steps are involved in constituting a single-arbitrator tribunal under Decree-Law 10/2011?
The procedural steps under Decree-Law 10/2011 for constituting a single-arbitrator tribunal are: (1) The claimant files an arbitration request with CAAD; (2) The CAAD President accepts the request and notifies parties to appoint arbitrators within 10 days; (3) If the claimant does not appoint an arbitrator (as in Decision 183/2016-T), the Deontological Council designates one per Articles 6(1) and 11(1)(b); (4) Parties are notified of the designation and may refuse within the legal period under Article 11(1)(a)-(b) and the Deontological Code Articles 6-7; (5) Once accepted, the tribunal is formally constituted per Article 11(1)(c); (6) The arbitrator issues an order notifying the Tax Authority to respond within the legal deadline (Articles 17(1)-(2) RJAT). In this case, the tribunal was constituted on 28 June 2016.
How does the CAAD handle preliminary objections (exceções) raised by the Tax Authority in arbitral proceedings?
When the Tax Authority raises preliminary objections (exceções) in arbitral proceedings, CAAD follows specific procedures to ensure both parties' rights. In Decision 183/2016-T, the AT submitted its response on 16 September 2016 including a jurisdictional exception. The tribunal issued an order notifying the claimants to comment within 10 days, which they did on 26 September 2016. On 30 September 2016, the tribunal issued an order deciding that the exception would be ruled upon in the final judgment rather than as a separate preliminary issue. This approach allows the tribunal to consider substantive and jurisdictional issues together when they are interconnected, promoting procedural efficiency. The tribunal also dispensed with the Article 18 hearing, finding sufficient elements in the file, with neither party objecting to this procedural economy measure.
What was the outcome of CAAD Decision 183/2016-T regarding the competence of the Arbitral Tribunal to rule on IRS professional income disputes?
While the excerpt does not provide the complete final decision, Decision 183/2016-T establishes that the CAAD Arbitral Tribunal addressed a competence challenge by the Tax Authority concerning its jurisdiction over IRS professional income disputes. The tribunal decided to rule on the jurisdictional exception in the final judgment rather than as a preliminary matter. The case proceeded to substantive analysis of whether the taxpayers' administrative services income should be taxed under the 0.75 coefficient (Article 151 activities) or 0.10 coefficient (Article 31(2)(e)). The tribunal's acceptance of the case and procedural handling indicates recognition of jurisdiction over IRS professional income classification disputes, though the specific outcome on competence would be detailed in the final ruling portion not included in this excerpt.