Process: 190/2016-T

Date: November 2, 2016

Tax Type: IRS

Source: Original CAAD Decision

Summary

In Process 190/2016-T, the CAAD arbitral tribunal addressed a challenge to an IRS additional assessment of €31,380.49 for fiscal year 2012. The taxpayer, engaged in real estate buying and selling under the simplified taxation regime (regime simplificado), sold a property for €340,000 that had been purchased for €458,000, resulting in an actual economic loss of €118,000. However, under article 31 of the IRS Code, the simplified regime calculates taxable income as 20% of gross sales, yielding taxable income of €68,000 despite the actual loss. The taxpayer argued this violated the constitutional principle of contributory capacity (article 104, no. 2 CRP), as it taxes non-existent income. The Tax Authority raised a critical preliminary objection of untimeliness, arguing the arbitration request was filed one day beyond the 90-day deadline established in article 10, no. 1, a) of RJAT. The taxpayer failed to respond to this preliminary objection. This case highlights the tension between simplified taxation regimes designed for administrative efficiency and the constitutional principle that taxation should reflect actual economic capacity. It also underscores the critical importance of strict compliance with procedural deadlines in tax arbitration, as late filing results in caducidade (expiration of the right of action) and dismissal regardless of substantive merit.

Full Decision

ARBITRAL DECISION

1. REPORT

1.1. A…, taxpayer no. …, domiciled at …, …, … (hereinafter referred to as the "Claimant"), filed on 28/03/2016 an application for arbitral determination with a view to the examination and declaration of illegality of the additional assessment of Personal Income Tax (IRS), relating to the fiscal year 2012, numbered 2014…, in the total amount of € 31,380.49 (thirty-one thousand three hundred and eighty euros and forty-nine cents), as well as the dismissal order of the hierarchical appeal filed against the amicable claim regarding said assessment.

1.2. The Honourable President of the Deontological Council of the Administrative Arbitration Centre (CAAD) appointed, on 26/04/2016, the signatory of this decision as sole arbitrator.

1.3. On 14/06/2016 the arbitral tribunal was constituted.

1.4. In compliance with the provisions of article 17, no. 1 of the Legal Framework for Tax Arbitration (RJAT), the Tax and Customs Authority (AT) was notified, on 15/06/2016, to, if it so wished, submit its response and request the production of additional evidence.

1.5. On 15/07/2016 the AT submitted its response, raising preliminary objections and substantive defenses.

1.6. On 18/07/2016, in view of the content of the response submitted by AT, the arbitral tribunal granted the Claimant a period of 10 days to comment, if it so wished, on the preliminary objection regarding the statute of limitations raised.

1.7. The Claimant did not comment on the preliminary objection raised by AT.

1.8. On 11/10/2016, the arbitral tribunal decided to dispense with the holding of the hearing referred to in article 18, no. 1 of the RJAT, on the basis of the principle of autonomy of the arbitral tribunal in the conduct of the proceedings, inviting both parties to, if they so wished, submit optional written submissions and set the date for the delivery of the final decision.

1.9. On 24/10/2016 the Claimant submitted optional written submissions.

1.10. The AT did not submit written submissions.

2. PRELIMINARY MATTERS

The arbitral tribunal was properly constituted and is materially competent.

The parties have legal personality and capacity and are entitled to bring the proceedings, and there are no defects in representation.

The proceedings do not suffer from defects that would render them invalid.

Consequently, the conditions are met for the final decision to be delivered.

3. POSITIONS OF THE PARTIES

As the basis of its claim, the Claimant alleges in summary that:

a) Regardless of the fact that all general principles of tax law are contradicted, and that the taxation in question constitutes a true violation of the Claimant's contributory capacity, the AT has failed to sustain the legality of the assessment;

b) Indeed, sustained on purely instrumental and subordinate norms, both in relation to the formal protection norms referred to in article 103, no. 2 of the Constitution of the Portuguese Republic (CRP), and in relation to the principle of contributory capacity established in article 104, no. 2 of the CRP, the taxation of enterprises is fundamentally based on their actual income;

c) In short, enterprises should be taxed when they have income and in the exact measure of that income;

d) Now, in the case in question, the Claimant, catapulted into a taxation regime from which it cannot exit except after periods of three years, ends up being taxed in contradiction with all the tax principles presented;

e) In fact, despite the loss incurred in the transaction (the only one carried out in the three-year period) in the amount of 118,000.00 euros, the Claimant ends up being taxed on income of 68,000.00 euros [1];

f) According to the Claimant, the assessment in dispute does not constitute an assessment of actually earned income, but rather taxation on non-existent taxable matter;

g) All the more so, since it was the only transaction in the taxation period referred to in the assessment questioned here, and the devaluation of the real estate buying and selling sector is general knowledge;

h) For all the foregoing reasons, the assessment in question, if maintained in the legal order, constitutes a true violation of the Claimant's contributory capacity.

The AT contested by alleging in summary, by preliminary objection, the untimeliness of the application for arbitral determination, since this was made 1 (one) day after the end of the 90-day period referred to in article 10, no. 1, subparagraph a) of the RJAT.

Without conceding, the AT further alleged, by substantive defense, in summary that:

a) The simplified taxation regime constitutes a non-mandatory regime, valid only for those who have not opted for the organized accounting regime;

b) Now, the Claimant had been, since 2008, in that simplified taxation regime and could, in 2011, have opted for the organized accounting regime;

c) However, it did not exercise that option, choosing instead to remain in the simplified taxation regime;

d) In fact, the application of the coefficients provided for in article 31 of the IRS Code does not serve to determine the tax to be levied, but rather to determine the taxable income, on which the applicable IRS rate will be levied;

e) Wherefore the allegation of the Claimant cannot be accepted, to the effect that the simplified regime only takes into account sales for the calculation of IRS, "disregarding all and any ancillary costs with the purchase";

f) According to the AT, this statement does not correspond to the truth, in that taxable income is calculated as 20% of sales, and the cost is 80% of the same;

g) Thus, faced with the declaration of business income of 340,000.00 euros, the AT, being bound by the principle of legality, could not refrain from taxing the Claimant in accordance with the provisions of the regime of article 31 of the IRS Code;

h) Contrary to what was stated by the Claimant, the AT did not proceed to any presumption of income;

i) Rather, faced with the declared annual income, it proceeded to its respective taxation, by the rules of the taxation regime in which the Claimant was found to be classified and in which it chose to be classified and to remain in 2012;

j) On the other hand, the invocation of the principle of contributory capacity does not serve the interests of the Claimant, since in fact, its actual income, in the year 2012, amounted to 340,000.00 euros;

k) As the Claimant did not exercise the option for the organized accounting regime, no other decision could have been made by the AT.

4. MATTERS OF FACT

4.1. FACTS DEEMED TO BE PROVED

In light of the documents submitted to the proceedings, it is deemed proved that:

4.1.1. By public deed executed on 30/12/2009 at the Notarial Office of …, the Claimant acquired the urban property located at …, lot …, …, registered in the respective land registry under registration number …, for the price of 458,000.00 euros.

4.1.2. With reference to the three-year period from 01/01/2011 to 31/12/2013, the Claimant was classified under the simplified taxation regime for the activity of buying and selling real estate.

4.1.3. On 08/09/2012, within that activity, the Claimant sold for 340,000.00 euros the property which it had acquired on 30/12/2009 for 458,000.00 euros.

4.1.4. On 27/05/2013, the Claimant submitted the Personal Income Tax Form 3 (Modelo 3), relating to the year 2012, indicating the sale of the property in Annex G, and not submitting Annex B.

4.1.5. On 15/07/2013, the Claimant submitted a substitute declaration, maintaining what was declared in Annex G, but submitting Annex B, however declaring nothing therein.

4.1.6. On 24/07/2014, the Claimant submitted a new substitute declaration, annexing Annex G, but no longer declaring the referred sale therein, and indicating the same sale in Annex B.

4.1.7. On 05/08/2014, the Claimant was notified of the additional IRS assessment, no. 2014…, relating to the fiscal year 2012, in the amount of € 31,380.49.

4.1.8. Not agreeing with the referred IRS assessment, the Claimant submitted, on 05/01/2015, an amicable claim (case no. …2015…) on the grounds that the taxation effected did not take into account any of the legal principles of Tax Law, since it taxes a loss as if it were a profit.

4.1.9. On 23/02/2015, the Claimant was notified of the draft decision dismissing the amicable claim, having chosen not to exercise its right of prior hearing.

4.1.10. On 07/04/2015, the Claimant was notified of the conversion into final of the draft decision dismissing the amicable claim.

4.1.11. Dissatisfied, the Claimant submitted, on 05/05/2015, a hierarchical appeal (case no. …2015…) of the decision dismissing the amicable claim.

4.1.12. On 28/12/2015, the Claimant was notified of the dismissal order of the hierarchical appeal filed against the amicable claim of the 2012 assessment.

4.1.13. On 28/03/2016, the Claimant filed the application for arbitral determination that gave rise to the present proceedings.

4.2. FACTS DEEMED NOT TO BE PROVED

There are no facts of relevance to the decision that have not been deemed proved.

5. THE LAW

5.1. PRELIMINARY OBJECTION REGARDING THE UNTIMELINESS OF THE APPLICATION FOR ARBITRAL DETERMINATION

A preliminary matter to be decided is the preliminary objection raised by the AT regarding the untimeliness of the application for the constitution and determination of the arbitral proceedings.

Thus, in accordance with article 10, no. 1, subparagraph a) of the RJAT, the application for the constitution of an arbitral tribunal is submitted within a period of 90 days from the facts provided for in no. 1 and no. 2 of article 102 of the Code of Tax Procedure and Process (CPPT).

In the situation in question, the provision applicable by referral from no. 2 of article 102 of the CPPT (then still in force) is, thus, that which institutes as the determining temporal criterion for the counting of the aforementioned 90-day period the notification of dismissal of the hierarchical appeal.

The Claimant was notified of the dismissal act of the hierarchical appeal contesting the dismissal of the amicable claim submitted against the IRS assessment no. 2014…, on 28/12/2015.

Now, the present application for arbitral determination was submitted on 28/03/2016, that is, after more than 90 days following the notification of the dismissal act of the hierarchical appeal.

Regarding the deadline for submission of the application for the constitution of an arbitral tribunal, as provided for in article 10 of the RJAT, being prior to the arbitral procedure, and, obviously, also prior to the arbitral proceedings, article 3-A of the RJAT will not apply; rather, by referral from article 29, no. 1, subparagraph a) of the RJAT and from article 20, no. 1 of the CPPT, the regime provided for in article 279 of the Civil Code will apply.

In these terms, bearing in mind the legal provisions set out above, the preliminary objection regarding the untimeliness of the application for arbitral determination is well-founded, determining the dismissal of the AT.

Considering the raised preliminary objection to be well-founded, the examination of the remaining issues raised in the case is prejudiced.

6. DECISION

In view of the foregoing, it is determined that the preliminary objection regarding the untimeliness of the application for arbitral determination raised by the AT is well-founded and, as a consequence, the Respondent is dismissed from the instance, and it is further determined that the examination of the issue on the merits is prejudiced.

7. VALUE OF THE PROCEEDINGS

The value of the proceedings is set at € 31,380.49 (thirty-one thousand three hundred and eighty euros and forty-nine cents), in accordance with article 97-A of the Code of Tax Procedure and Process (CPPT), applicable by virtue of subparagraphs a) and b) of no. 1 of article 29 of the RJAT and of no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

8. COSTS

Costs to be borne by the Claimant, in the amount of € 1,836.00 (one thousand eight hundred and thirty-six euros), in accordance with Table I of the Regulation of Costs of Tax Arbitration Proceedings, in accordance with no. 2 of article 22 of the RJAT.

Notify.

Lisbon, 2 November 2016

The Arbitrator,
Hélder Filipe Faustino

Text prepared by computer, in accordance with the provisions of no. 5 of article 131 of the CPC, applicable by referral from subparagraph e) of no. 1 of article 29 of the RJAT. The drafting of this decision follows the spelling prior to the Orthographic Agreement of 1990.

[1] Corresponding to 20% of the value of the sale of 340,000.00 euros, by virtue of the application of the coefficient provided for in article 31 of the IRS Code.

Frequently Asked Questions

Automatically Created

What is the simplified taxation regime (regime simplificado) for IRS in Portugal?
The simplified taxation regime (regime simplificado) for IRS in Portugal is a non-mandatory taxation method available to taxpayers who do not opt for organized accounting (contabilidade organizada). Under article 31 of the IRS Code, for real estate buying and selling activities, taxable income is calculated as 20% of gross sales, with the remaining 80% deemed to represent costs. The regime operates in three-year periods, and taxpayers can only exit at the end of each period. It does not require detailed documentation of actual costs and expenses, making it administratively simpler but potentially disadvantageous when actual costs exceed the deemed 80% or when transactions result in losses.
What happens if a tax arbitration request is filed after the legal deadline in Portugal?
When a tax arbitration request is filed after the legal deadline in Portugal, it results in caducidade do direito de ação (expiration of the right of action). Article 10, no. 1, a) of RJAT establishes a 90-day period for filing arbitration requests. If this deadline is exceeded, even by one day, the Tax Authority can raise a preliminary objection of untimeliness. If upheld, the arbitral tribunal lacks jurisdiction to examine the merits of the case, and the request must be dismissed on procedural grounds. This is a peremptory deadline that cannot be extended, and failure to comply bars the taxpayer from pursuing arbitration regardless of the substantive merit of their claims.
Can a taxpayer challenge an IRS additional tax assessment through CAAD arbitration?
Yes, a taxpayer can challenge an IRS additional tax assessment through CAAD (Centro de Arbitragem Administrativa) arbitration, provided the request is filed within the applicable legal deadlines. CAAD has material jurisdiction over challenges to IRS assessments, including additional assessments resulting from tax inspections or corrections. However, strict procedural requirements must be met, including the 90-day filing deadline from notification of the final administrative decision (such as dismissal of a hierarchical appeal). Taxpayers can challenge both the legality of the assessment and the quantum (amount) assessed. The failure to respond to preliminary objections raised by the Tax Authority, such as timeliness challenges, can significantly weaken the taxpayer's position and may result in dismissal without examination of the substantive tax issues.
What is the legal consequence of not responding to a timeliness objection raised by the Tax Authority?
The legal consequence of not responding to a timeliness objection raised by the Tax Authority in Portuguese tax arbitration proceedings is that the arbitral tribunal will decide the preliminary matter based solely on the evidence and arguments presented by the Tax Authority. While there is no automatic presumption against the claimant, failure to respond significantly weakens their position. The tribunal has a duty to examine jurisdictional issues ex officio, but the absence of counter-arguments makes it more likely the objection will be upheld. If the timeliness objection is sustained due to lack of response, the case will be dismissed without examination of the merits, resulting in caducidade (expiration of the right of action) and leaving the challenged tax assessment intact.
How does the right of action expiration (caducidade do direito de acção) affect tax arbitration proceedings?
The expiration of the right of action (caducidade do direito de ação) is a fatal procedural defect in tax arbitration proceedings that operates as an absolute bar to jurisdiction. When caducidade is established—typically through filing after statutory deadlines such as the 90-day period in article 10, no. 1, a) of RJAT—the arbitral tribunal lacks competence to examine the substantive merits of the case. Caducidade must be raised as a preliminary objection and decided before any consideration of substantive issues. If upheld, the proceedings are dismissed, the challenged tax assessment becomes final and enforceable, and the taxpayer loses the right to challenge it through arbitration. Unlike some procedural defects that can be cured, caducidade is definitive and prevents any further arbitral review of the tax matter in question.