CAAD Case 190/2018-T: IRS Withholding Tax on Profit Distribution and Travel Allowances – Burden of Proof

Arbitration Award

I – Report

1. The taxpayer A..., LDA, with the Tax Identification Number ... (hereinafter "Claimant"), filed, on 12 April 2018, a request for the constitution of a Collective Arbitral Tribunal, pursuant to the combined provisions of articles 2nd and 10th of Decree-Law no. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter "LRATM"), in which the Tax and Customs Authority is the Respondent (hereinafter "TCA" or "Respondent").

2. The Claimant seeks an arbitral ruling on the illegality of acts of additional assessment of Personal Income Tax (PIT) and compensatory interest, relating to the years 2012, 2013, 2014 and 2015. It listed three witnesses.

3. The request for the constitution of the Arbitral Tribunal was accepted by the esteemed President of CAAD and automatically notified to the TCA.

4. The Deontological Council appointed the arbitrators of the Collective Arbitral Tribunal, who communicated acceptance of the charge within the applicable period, and notified the parties of this appointment.

5. The Collective Arbitral Tribunal was constituted on 25 June 2018.

6. Pursuant to art. 17th of the LRATM, the TCA was notified, on 28 June 2018, to file its response.

7. The TCA filed its Response on 17 September 2018, in which it pleads for the total dismissal of the Claimant's request.

8. The Arbitral Order of 25 September 2018 dispensed with the holding of the meeting referred to in art. 18th of the LRATM, dismissing the request for witness examination, on the grounds that the articles of the Tax Procedure Code on which the witness evidence would bear contain not facts but interpretations and conclusions, leaving such evidence without purpose.

9. The Tribunal allowed time for written submissions and set 20 November 2018 as the deadline for the issuance and notification of the Arbitral Decision.

10. On 18 October 2018, the CAAD received, from the Finance Department of ... – Division of Tax Criminal Proceedings, a request for delivery of the procedural documents submitted within the scope of arbitral proceedings nos. 190/2018-T and 191/2018-T, with a view to instructing the inquiry proceedings no. .../15...T..., which are being conducted in the 1st Section of the Public Prosecutor's Office of ... against the Claimant; a request which was granted by the CAAD in its response of 23 October 2018.

11. The proceedings do not suffer from nullities and no further preliminary or subsequent issues remain, whether prejudicial or exceptional, that would prevent the consideration of the merits of the case, with conditions being in place for a final decision to be delivered.

12. The TCA proceeded with the designation of its representatives in the file and the Claimant attached a power of attorney (and subsequent substitution), with the Parties thus being duly represented.

13. The Parties have legal personality and capacity and have legitimacy.

II – Reasoning: The Facts

II.A. Facts considered proven and relevant to the decision

1. The Claimant is engaged in the rental of equipment for civil construction, the preparation of land for construction (earthworks, demolitions) and the construction of walls in masonry and old stone.

2. The Claimant has two partners, B..., who holds 74% of the share capital and is married to C...; and D....

3. The turnover declared by the Claimant was as follows:

1. By memorandum of 13-07-2016 of the 1st Section of the Public Prosecutor's Office of ..., the Finance Department of ... / Division of Tax Criminal Proceedings was notified of the order issued within the scope of the inquiry proceedings no. .../15........., which reads as follows:

"In this case, investigation is being conducted into facts that may constitute the commission of a tax fraud crime punishable by article 103rd of the Tax and Customs Code and a money laundering crime punishable by article 368th A of the Criminal Code. [§] From the elements brought to the record there is evidence of the disparity between the assets of the suspects and their income declarations. [...] It is important to promptly investigate this matter and essentially to ensure that the proceeds of the crime are not dissipated. [§] Now, the successful investigation of the typical illegal conduct that is indicated as well as the safeguarding of the fundamental rights of the procedural subjects, namely the good name and reputation of the suspect, could be compromised by the publicity of the proceedings. [§] The investigation strategy, namely the investigation and monitoring of bank accounts, could be compromised by the publicity of the proceedings as well as the obtaining of documentary evidence that may exist. [§] Thus, bearing in mind the content of the evidence collected, the specificity of the factual matter to which the object of the present record refers, and also the objective that it is intended to achieve with the investigations, in accordance with the provision of article 86th no. 3 of the Criminal Procedure Code and taking into account the Order of the Office of the Attorney General of ... no. 2/08 of 9-1-2008, I determine that the investigations and the subsequent proceedings of the present record shall be conducted under the secrecy of justice regime, during the Inquiry phase and for the maximum period of time legally permitted. [§] Coming to this office, and bearing in mind that investigation is being conducted, in addition to facts capable of constituting the commission of a tax fraud crime punishable by article 103rd of the Tax and Customs Code, the commission of a money laundering crime, in accordance with the provisions of art. 7th no. 2 lit. i) of Law 49/2008 of 27 August, I delegate the present investigation to the Judicial Police. [§] However, and bearing in mind the inspection action that is underway, and which should be carried out by the TCA, the present record should be investigated by a mixed team, maintaining the possible investigation of the tax crime in charge of the TCA."

1. For this reason, the Claimant was subject to inspection actions, covered by service orders nos. OI 2016..., OI 2016..., OI 2016... and OI 2016..., relating to the years 2012 to 2015.

2. The inspection actions began on 3 November 2016, with notification of the Claimant. The scope of the inspection procedure was changed to general as it was deemed appropriate to analyze the Claimant's tax situation more broadly, namely with respect to the control of PIT withholdings at source.

3. The Tax Inspection found the following:

"II.1.1. TAX IN DEFAULT – WITHHOLDINGS AT SOURCE

III.1.1.1. SUBSISTENCE ALLOWANCES

From the analysis carried out on personnel expenses, we found that annually there were recorded charges for subsistence allowances (SNC account 6388 – Other Personnel Expenses – Subsistence Allowances), in the following amounts:

• Year 2012 - €175,550;
• Year 2013 - €95,253.25;
• Year 2014 - €87,092.62;
• Year 2015 – €124,069.14.

Subsistence allowances are intended to compensate the worker for expenses borne by him in connection with meals (lunch and dinner) and accommodation, with the conditions for their allocation being set out in art. 8 of Decree-Law no. 106/98, of 24 April. However, in the years under review, we verified that the company also declared monthly expenses with travel and accommodation, recorded in SNC account 62512, in the following amounts:

[table in original document]

The supporting documents are divided into three journals: purchases (code 5), miscellaneous operations (code 7) and banks (code 9), each reflecting the following amounts:

[table in original document]

Having analyzed the supporting documents, we verified that 95% of the recorded amount, in the years under review, refers to expenses with meals and accommodation, as we only identified amounts of €9,802 in 2012 (internal documents: 2012-01-31 5 1079, 2012-02-29 9 2012, 2012-02-29 9 2037 and 2012-06-30 9 6023) and €137 in 2013 (internal documents: 2013-01-31 9 1092 and 2013-01-31 9 1093) associated with airplane travel expenses.

It was also verified that the amounts recorded to the debit of SNC account 6512, in the "Journal – 7 – Miscellaneous Operations" document series, in virtually all accounting entries, result from the sum of various invoices from the same issuer (restaurant/lodging), whereby the total amount recorded in the account results from the sum of hundreds of documents, associated with daily/weekly consumption. Now, the documentary analysis carried out on the expenses recorded in the travel and accommodation account, in the "Journal – 7 – Miscellaneous Operations" document series, led us to conclude that the monthly amounts received by employees as subsistence allowances constitute a salary supplement to them, bearing in mind that meals and accommodation were provided by the company.

Furthermore, in the monthly amounts paid as subsistence allowances, the deduction of the meal allowance included in salary processing was not made, as stipulated by art. 37th of Decree-Law no. 106/98, of 24 April.

In the sphere of beneficiaries and for PIT purposes, in accordance with the provision of lit. d) of no. 3 of art. 2nd of the PIT Code, income from dependent work includes subsistence allowances to the extent that they exceed the legal limits or when the requirements for their allocation to state employees are not observed.

These are income subject to tax and not exempt from it; however, for the purposes of determining the withholding tax rate to be applied in each salary processing and for each employee covered by subsistence allowances, the company did not take into account the amount paid as a subsistence allowance, and therefore did not effect the withholding at source of the PIT amounts owed by law, including the withholding resulting from the application of the 3.5% surcharge, as stated in no. 5 of art. 187th of Law no. 66-B/2012 (State Budget 2013).

Similarly, it did not include the annual value paid relating to these same remuneration in the declaration for communicating income and withholdings, provided for in lit. b) of no. 1 of article 119th of the PIT Code. And, consequently, the workers did not mention these remuneration in the annual income declaration provided for in article 57th of the PIT Code.

In accordance with article 99th of the same legal instrument, entities owing dependent work income are obliged to withhold tax at the moment of its payment or placement at the disposal of the respective holders. Thus, the amounts of tax owed, not withheld and not paid to the state treasury, shall be demanded from the company in its capacity as a tax substitute, as the joint and several liability provided for in no. 4 of article 103rd of the PIT Code applies, according to which:

"In the case of income subject to withholding that has not been accounted for or communicated as such to the respective beneficiaries, the substitute assumes joint and several liability for the tax not withheld." The annual amounts of tax in default amount to €38,757, €25,105, €21,632 and €28,619, in 2012, 2013, 2014 and 2015, respectively, relating to the amounts paid as subsistence allowances, as detailed below:

[table in original document]

The breakdown by tax period of the amounts determined for subsistence allowances subject to tax is found in the tables in Annex I.

It should be noted that in the analysis carried out, the amounts paid in the years 2013 to 2015 relating to employees E..., Tax ID..., F..., Tax ID... and G..., Tax ID, ..., were not included, bearing in mind that the supporting tables refer to payments of kilometers, which relate to compensation to the worker for the use of own vehicle in the service of the employer, and not to subsistence allowances.

(...)

III.2.2.3. SUBSISTENCE ALLOWANCES

In the income declarations Form 22 for the years 2012, 2013, 2014 and 2015, the taxpayer determined autonomous tax assessments under the Corporate Income Tax (CIT) at the rate of 5%, relating to the entire amount recorded as subsistence allowances and compensation for travel in own vehicle of the worker (km's), in SNC account 6388 Other Personnel Expenses - Subsistence Allowances, in the amount of €175,500, €95,523.25, €87,092.62 and €124,069.14, for each of the said years.

In view of the provisions of no. 9 of art. 88th of the CIT Code "The following are assessed autonomously at the rate of 5%: deductible expenses relating to subsistence allowances and compensation for travel in own vehicle of the worker, in the service of the employer, not invoiced to clients, recorded under any heading, except to the extent that there is taxation under the PIT in the sphere of the respective beneficiary, ..."

Thus, bearing in mind the correction proposed in section III.1.1., to the amounts on which the 5% autonomous tax rate was applied, the amounts should have been deducted, relating to subsistence allowances considered income and as such subject to taxation under the PIT in the sphere of the worker, determining the values of €8,777.50, €4,680.57, €4,324.63 and €6,097 of tax to be recovered by the taxpayer in each of the years 2012, 2013, 2014 and 2015, respectively, as shown in the table presented in the following section.

(...)

III.1.1.2. INVESTMENT INCOME

The present inspection action on A..., took place simultaneously with inspection actions on the partner and manager B... and on the spouse C.... The actions were authorized by service orders no. 012016..., 012016..., 012016... and 012016... and also covered the same time period of years 2012, 2013, 2014 and 2015, respectively.

(...)

Procedures carried out

Within the framework of the inspection actions on the partner and manager B... and the spouse C..., a request was made for information about the bank accounts, carried out with the Bank of Portugal, as a result of the authorization granted by them to the Tax Authority to access the bank documents referred to in art. 63rd-B of the General Tax Code

(...)

Conclusion

From the analysis carried out, it was verified that the management of the company's financial resources was developed in an unclear and imprecise manner throughout the years under review. The bank records of the private and company accounts demonstrate a mixture of movements of private scope with those of a business nature, with the assets allocated to the exercise of the activity being confused with the assets belonging to B... and his spouse; in the clarifications provided during the inspection action, he justified this procedure with the fact that he was the only "owner of the company".

Given the above in the preliminary considerations and the information collected in the context of the waiver of banking secrecy for the accounts held by the taxpayers B... and C..., particularly the fact that they did not present any justification regarding the origin of a significant number of credit movements (the total in 2012) shown in their bank accounts, as well as the fact that the justifications presented for the remaining part of the credits for 2013, 2014 and 2015 were not properly substantiated, lacking credibility, we conclude that they relate to funds from income/gains from the activity of A..., which were omitted from the financial statements and for tax purposes.

According to the breakdown made above, in the years 2012, 2013, 2014 and 2015, the taxpayers B... and C... received amounts of €62,556.25, €201,525, €207,179.20 and €124,420.94, respectively.

These funds are classified, for tax purposes, under the PIT, in the sphere of the respective beneficiaries, as distributed profits, classified under Category E - Investment Income, pursuant to lit. h) of no. 2 of art. 5th of the PIT Code.

Pursuant to lit. a) no. 1 of art. 71st of the PIT Code, investment income obtained in Portuguese territory by residents, paid by or through entities that have here their head office, effective management or permanent establishment to which the payment should be attributed and that have organized accounts, is subject to withholding at source as a final tax at the liberatory rate of 28%.

The withholding at source is the responsibility of the entity owing the income, in accordance with lit. a) of no. 2 of art. 101st of the PIT Code, and should be effected at the moment of placement at the disposal, in accordance with the provisions of no. 2 of lit. a) of no. 3 of art. 7th of the PIT Code.

Thus, the amounts of annual tax in default were determined to be €17,515, €56,426, €58,009 and €34,836, in 2012, 2013, 2014 and 2015, respectively, relating to the amounts placed at the disposal of the partners, as distributed profits, as detailed below:

[table in original document]

1. Following the tax inspection, the Claimant received additional assessments of PIT relating to the years 2012 to 2015, increased by compensatory interest:

1. These assessments correspond to conclusions based on the Inspection Report regarding the absence of PIT withholding at source on distributed profits, in accordance with art. 71st, 1, a) of the PIT Code; and regarding the absence of declaration of actual remuneration that could be classified under Category A, previously presented as "subsistence allowances", and the corresponding lack of withholding at source, in accordance with art. 99th of the PIT Code.

2. The Claimant filed on 12 April 2018 the Request for Arbitral Pronouncement.

II.B. Facts considered not proven

Based on the documentary elements made available in the file and consensually accepted by the parties, it is verified that nothing remains to be proven that is of interest for the decision of the case.

II.C. Reasoning of the factual matters

The proven facts are based on the documents submitted by the Claimant with the request for arbitral pronouncement and on the administrative file.

III – Reasoning: Legal Matters

III.A. Position of the Claimant

a) The Claimant begins by arguing (arts. 5 and 6 of the TPF) that, although it has not requested the cumulation of claims under the provisions of art. 3rd of the LRATM, it would be advantageous for the celerity and procedural simplification, as well as for the uniformity of decisions, that other claims relating to VAT and CIT assessments for the same years 2012 to 2015 be appreciated jointly with this one.

b) As grounds for the request for annulment, the Claimant begins by invoking the expiry of the right to assess the year 2012, pursuant to art. 45th, 1 of the General Tax Code, rejecting the application to the case of the deadline extension provided for in no. 5 of that art. 45th, since it must be precisely the same facts in relation to which criminal proceedings were instituted, and not any others – and the Claimant believes that the TCA precisely intends to overcome the expiry deadlines with respect to facts in relation to which no criminal investigation was instituted, with the required identity of the facts investigated within the scope of the criminal proceedings and those that constitute the basis of the assessment not being met.

c) The Claimant insists that the mere opening of an investigation proceedings does not allow the TCA, without more, to proceed with the assessment of any and all tax (in this case, PIT withholdings) without observing the normal expiry deadline.

d) Thus, the Claimant infers, as the TCA did not, in the Inspection Report, indicate the facts to which the inquiry proceedings no. .../15........... refers, nor authorized its consultation, it remains unknown whether, in fact, the expiry of the 2012 assessment occurred or not.

e) The Claimant alleges that the contested tax acts are not duly substantiated, with the omission of substantiation being grounds for annulment of those acts.

f) Regarding the "distribution of profits", the Claimant disagrees with the methodology employed in the Inspection directed at its managing partner and respective spouse, namely disregarding the outflows in the bank accounts that, related to the inflows in the same accounts, could justify these; and, more generally, not giving the notified parties (and other involved parties) the opportunity, or the time, to make full proof of the movements inspected.

g) The Claimant understands that, given the circumstances of ignorance of the origin and nature of the financial movements, the TCA should have followed another path, that of applying the regime of manifestations of fortune, governed by art. 87th, 1, f) of the General Tax Code – because, except for the year 2012, the deposits exceeded the value of €100,000, the implicated parties were notified to prove the nature of the deposit movements and did not provide, in a capable and proven manner, the elements necessary and sufficient to exclude taxation under the PIT and by classification under Category G of income: which means the almost complete fulfillment of the requirements of that regime.

h) And that therefore, given the absence of concrete data on the origin and nature of the patrimony increases, the TCA should not have followed the path it followed, and which was that of involving the Claimant in what it investigated and determined regarding the managing partner of the Claimant and his spouse, to conclude that the financial movements to the credit of the bank accounts held by those parties, not justified, related to funds from income/gains from the activity of the Claimant, which were omitted from the financial statements and for tax purposes.

i) The regime of manifestations of fortune would serve to enable the realization of tax assessments when there are no elements that sufficiently prove the source and nature of the increases and to classify them tax-wise in another category of income – not to, based on indications in bank accounts, extrapolate to the objective elements that are demanded by a direct taxation.

j) In assessing for PIT as "investment income", and namely as "distributed profits", another illegality would have been committed, given that the spouse of the managing partner, C..., is not a partner of the Claimant, and therefore cannot obtain income of that nature.

k) In sum, the Claimant understands that the TCA, on which the burden of proof allegedly rests (art. 74th, 1 of the General Tax Code), failed, within the scope of the inspection procedure, to obtain factual elements that demonstrated, or even indicated, the existence of the omission of those profits and any distribution of profits that might derive from it – remaining at the level of mere suspicions.

l) And thus, as regards the "distribution of profits", the Claimant concludes that the annulment of the assessments made is required.

m) As to the payment of subsistence allowances, the Claimant begins by recalling that the provision of art. 103rd, 4, of the PIT Code was applied, which establishes the joint and several liability of the substitute for the tax not withheld, when the income in question has not been communicated to the beneficiaries as being subject to taxation.

n) But as the Claimant did not mention the amounts relating to subsistence allowances in the communication of income received through the declaration provided for in art. 119th, 1, b) of the PIT Code, but the TCA does not prove that this communication did not occur in those precise terms, the possibility of resorting to the joint and several liability of the Claimant falls away – returning to the principle that the actual taxpayers are the workers and not the entity paying the subsistence allowances.

o) In that case, the Claimant continues, the workers must be notified and taxed and be given the right to file a gracious protest or judicially contest the PIT assessment that affects their tax sphere through withholding and as payment on account of the final tax due.

p) The Claimant insists that the withholding of tax on account of the final tax due does not relieve the TCA of the duty to determine the overall PIT assessment that applies to the subjects in question, which can only be done by considering the totality of their income and their personal charges and deductions. Being that, in its view, only with the additional assessment to the workers can the exact tax that resulted in damage to the state treasury be determined.

q) In sum, the assessments relating to the payments of subsistence allowances would be illegal because they were not made in the person of the alleged beneficiaries of the income attributed.

r) Next, the Claimant seeks to prove that the workers who were awarded subsistence allowances are not always exactly the same as those involved in the payment of invoices recorded as expenses for meals and accommodation, and that therefore the TCA made the error of being guided by mere simultaneity of the occurrence of expenses. Additionally, it argues that there is no duplication of expenses, and that the TCA cannot call into question the faculty that the Claimant has to adopt different criteria in the option that it can legally exercise between granting subsistence allowances and bearing the expenses directly – being that there are countless circumstances that can lead, in each situation, to different solutions.

s) And concludes, on this point, that if the TCA, burdened with the proof, intended to demonstrate the duplication of expenses through mere mention of the recording of expenses with both natures, that effort is frustrated, because, for such, it would have to perform a detailed analysis that could demonstrate that, simultaneously, the workers were granted subsistence allowances and either did not make the respective travels, or, having done so, the Claimant paid directly the expenses that were inherent to them.

t) The Claimant alleges that also on this point there is insufficient substantiation in the TCA's decision, which it also illustrates with the circumstance, which it admits, that situations may have occurred in which the lunch allowance deduction was not made due to the processing of subsistence allowances to the workers – situations which, in its view, do not prove that the travel did not take place as proved by the document of that processing, but merely that there was an error in the allocation of salary, leading to possible subjection to PIT of the meal allowance incorrectly attributed.

u) Concluding that, in the absence of substantiation, either on the point concerning "distributed profits", or on that relating to "subsistence allowances", the assessments in question should be annulled in their entirety.

III.B. Position of the Respondent

a) In its Response, the Respondent maintains the understanding that the contested assessment constitutes a correct application of law, not suffering from any defect.

b) More specifically, the Respondent denies that there was a violation of the principle of thorough inquiry by the investigation measures being insufficient to gather the necessary evidence elements that would contradict the justifications that had been or would be presented by the Claimant.

c) It denies that the investigations into the managing partner of the Claimant and his spouse should have followed the path of applying the regime of manifestations of fortune, without involving the Claimant; denying that the option for direct taxation over the application of the regime of indirect methods is illegitimate.

d) And it also refutes the understanding that, in the subsistence allowances, only the workers should be notified and not the paying entity.

e) Regarding the allegation of expiry of the right to assess, the Respondent argues that there is clear identity between the facts that led to the institution of the inquiry proceedings and those that constitute the basis of the assessment, everything having originated in service orders on the same date, 3 November 2016, with the deadline for the completion of the inspection procedures being suspended following the institution of inquiry proceedings no. .../15........., in accordance with article 36th, 5, c) of the Tax Inspection Procedures Regulation, the Claimant having been notified of the fact, and the deadline for the expiry of the right to assess taxes having also been suspended, in accordance with article 46th, 1, of the General Tax Code – it merely happening that in the inspection procedure the complete content of the investigation was not communicated due to the secrecy of justice, in accordance with the provision of art. 86th, 3, of the Criminal Procedure Code.

f) Regarding the "distribution of profits", the Respondent argues that the principle of thorough inquiry was observed, and that the managing partner of the Respondent and the spouse of that managing partner were abundantly requested to provide all clarifications, verbally and in writing – in addition to the fact that abundant documentation was gathered, not only referring to the Claimant but also to entities that maintained commercial and financial relations with the Claimant (as is documented in the PA), some of it inconclusive because several movements appeared classified as "still not identified", other movements omit relations with third parties, and those that do not omit them merely record commercial transactions.

g) This made it possible to go beyond mere suspicions with the determination of facts such as:

1. the irregularities identified in the company's financial circuits, with the breach of the provision of art. 63rd of the General Tax Code and the abnormal balances evidenced in SNC account 111 Cash, demonstrative of the lack of clarity, accuracy and credibility of the same;

2. the very significant number of movements identified in the analysis of the accounts held by the managing partner and spouse, as being associated with A... (loans granted by the partner and reimbursement thereof, payments to suppliers, checks issued to individuals associated with entities related to the company, a very significant number of bearer checks, in amounts exceeding €1,000, atypical procedure from a private account);

3. the lack of credible substantiation of the few justifications presented for the various cash deposits and transfers, identified in the private accounts, demonstrative that they related to funds from income from the activity of A..., which were omitted from the financial statements and for tax purposes.

h) As regards the quantification of investment income, it was carried out in a direct and exact manner, as the determined amounts, added to the declared income of the years 2012 to 2015, resulted from the sum of the credits (deposits and transfers) shown monthly in the private bank accounts held by the couple, whose origin was not justified, verifying that the amounts were not estimated or presumed, whereby the conditions provided for in art. 87th of the General Tax Code, necessary for the realization of indirect assessment, were not met.

i) As regards the subsistence allowances processed in 2012, the Respondent clarifies that it was verified that they were recorded, in their entirety, on 31 December 2012, through a single accounting entry (identifier – 2012...), having been verified, through the analysis of the monthly payroll sheets presented by the taxpayer, that the amounts attributed monthly to each employee were not reflected in the respective monthly payroll sheets.

j) As regards the subsistence allowances processed in 2013 and 2014, the Respondent recalls that the subsistence allowances appear in the monthly payroll sheets, under the income rubric with the code "105 – Subsistence Allowances", having been verified that this monthly income, despite being income subject to PIT and not exempt from it, for the purposes of determining the withholding tax rate to be applied in each salary processing and for each employee covered by subsistence allowances, the company did not take into account the amount paid as a subsistence allowance, and therefore did not effect the withholding at source of the PIT amounts owed by law, including the withholding resulting from the application of the 3.5% surcharge, as stated in art. 187th, 5, of Law no. 66-B/2012 (State Budget 2013).

k) The evidence was obtained by resorting to monthly payroll sheets that constitute the accounting support for monthly salary processing; in addition, on its part, the declaration provided for in art. 119th, 1, b) of the PIT Code contains the same data as the Monthly Income Report, being that the values mentioned in each of the rubrics are annual and not monthly, being delivered by the company to the employee so that he mentions the information contained in it in the PIT income declaration, provided for in art. 57th of the PIT Code.

l) The Respondent clarifies that in the Inspection Report it does not call into question the legitimacy of the taxpayer to adopt different criteria as to the allocation of subsistence allowances to the various collaborators, as a function of the location of the works that it has and which involve charges for travels (meals and accommodation) of varying amounts for the same. But that what, in its view, clearly emerges is that a duplication of expenses with travels and accommodation was discovered, affecting the fact that the Claimant has diverse works, located at a distance from its head office – through the joint analysis of the tables supporting the subsistence allowances, recorded monthly via personnel expenses (SNC account 6388), and the supporting documents of the expenses for travels and accommodation, recorded monthly in SNC account 62512.

m) Hence, in the Respondent's view, it follows that the conclusion must be that the monthly amounts received by the employees as subsistence allowances would constitute a salary supplement to them, bearing in mind that meals and accommodation were provided by the company.

n) To reinforce this understanding, the verification that the monthly amount received as "Subsistence Allowance" is quite significant in relation to the amount allocated as "Base Salary", as is particularly illustrated in the years 2012 and 2013:

• Year 2012:
Total Base Remuneration - €104,250.83;
Total Subsistence Allowances - €175,631.50;
Weight of Subsistence Allowances in Remuneration – 168%.

• Year 2013:
Total Base Remuneration - €101,432.50;
Total Subsistence Allowances - €195,043.91;
Weight of Subsistence Allowances in Remuneration – 192%.

• Year 2014:
Total Base Remuneration - €142,190.37;
Total Subsistence Allowances - €86,492.61
Weight of Subsistence Allowances in Remuneration – 61%.

• Year 2015:
Total Base Remuneration - €177,849.30;
Total Subsistence Allowances - €121,940.00;
Weight of Subsistence Allowances in Remuneration – 69%.

o) The Respondent concludes its Response with the argument that the absence of any error attributable to the services in the issuance of the contested assessments was verified, whereby, being unfounded, any request for payment of indemnificatory interest fails.

IV. On the merits of the case

IV.1. A Recapitulation of the facts

In the inspection actions promoted against the managing partner of the Claimant, B..., and the spouse thereof, C..., both provided the information and clarifications requested – and it was based on this information and on access to bank accounts that the TCA came to conclude that, it being verified that there was a mixture of financial movements of a private nature with those relating to the business activity of the Claimant, the sums deposited in their bank accounts, the explanation for which was not accepted, related to funds from income/gains from the Claimant, omitted from the financial statements and tax declarations thereof.

As regards the PIT, the managing partner and the spouse would thus have appropriated the values corresponding to sales/services provided that were omitted from invoicing (for VAT purposes) and from declarations of gains for CIT purposes.

It was these omitted values that, classified as distributed profits, in view of the provision of art. 5th, 2, h) of the PIT Code, gave rise to the first part of the additional PIT assessments (by application of the withholding tax rate at source as a final tax of 28%, based on the provision of art. 71st, 1, a) of the PIT Code)

As to the payment of subsistence allowances, the analysis by the Tax Inspection of the expenses recorded by the Claimant led to the conclusion that the amounts received by its employees as subsistence allowances constituted, rather, a salary supplement to them, bearing in mind that meals and accommodation were provided by the Claimant itself – a conclusion reinforced by the finding that the deduction of the meal allowance included in the processed salary was not made, as determined by art. 37th of Decree-Law no. 106/98, of 24 April.

The TCA further found that the Claimant had not withheld any amount on the subsistence allowances paid, either as PIT or relating to the 3.5% surcharge, in accordance with the provision of art. 187th, 5, of Law no. 66-B/2012, whereby it proceeded with the calculation of the withholdings that should have been made, considering the particular situation of each worker.

Establishing that the Claimant had not stated, in the declarations for communicating income delivered to each worker, the annual amount paid as subsistence allowances, the TCA understood that the amounts not withheld would be demanded from the Claimant, in its capacity as a tax substitute, under the provision of art. 103rd, 4, of the PIT Code. And it is this second part that, added to the first, makes up, in total, year by year, the PIT assessments contested by the Claimant in the present proceedings.

IV.2. Questions to be decided

The Claimant alleges that the tax acts suffer from illegality, due to errors in factual prerequisites and due to errors in legal prerequisites, namely:

1. Expiry of the right to assess the year 2012
2. Lack of substantiation of the tax acts
3. Violation of the principle of thorough inquiry
4. Incorrect requalification of tax facts

Let us analyze them one by one, finding the order of their consideration irrelevant, as the establishment of an order of consideration of defects is only justified when the possible merit of the defects of priority consideration would make unnecessary the consideration of the remainder – which does not appear to be the case here.

IV.2.1. Expiry of the right to assess the year 2012

There is clear identity between the facts that led to the institution of the inquiry proceedings and those that constitute the basis of the assessment, all being identified in service orders on the same date, 3 November 2016, with the deadline for the completion of the inspection procedures being suspended following the institution of inquiry proceedings no. .../15........., in accordance with article 36th, 5, c) of the Tax Inspection Procedures Regulation, and the Claimant having been notified of the fact.

The Claimant thus knows, from the date of notification, that the deadline for the expiry of the right to assess taxes was also suspended, in accordance with article 46th, 1, of the General Tax Code.

On the other hand, the Claimant cannot allege ignorance of the complete content of the inquiry proceedings – due to the secrecy of justice, under the provision of art. 86th, 3, of the Criminal Procedure Code – because clearly it does not depend, nor could it depend, on such knowledge the suspension of the deadline for the expiry of the right to assess taxes; for, if understood otherwise, to achieve such an effect it would be necessary to commit an illegality, that of violation of the very secrecy of justice. It would, if it happened, be an illegality stimulated, paradoxically, by the law itself!

In sum, in the case at hand, the right to assess the year 2012 has not expired.

IV.2.2. Lack of substantiation of the tax acts

The minuteness and exhaustiveness of the demonstrations and calculations contained in the Inspection Report appear to correspond to the fulfillment of the requirements on which the verification of the duty of substantiation depends.

It has been understood in doctrine and jurisprudence that substantiation, even because of the imperative of clarity, should be simple, without ceasing to be complete.

This implies that, if the substantiation is already formulated completely at a certain stage of a procedure or process, it is more than unnecessary, by redundancy, to repeat it: it can even be counterproductive, converting itself into a painful reformulation of everything that has already been said, of everything that has already been argued, of everything that has already been documented – contributing presumably to information entropy by excess, resulting, in the end, in disinformation and vulnerability of he to whom the information should primarily benefit, which is its recipient: this the principle that dictates the solution enshrined in art. 77th of the General Tax Code.

In that same sense, it has already been recognized, in the sphere of tax arbitration, that "when the tax act (additional tax assessment, for example) arises as a consequence and in consequence of an inspection procedure carried out by the Tax Administration, the dialectic or dialogue that necessarily establishes itself between the taxpayer and tax inspection must make it difficult, in principle, not to comply with or even deficiently comply with this burden of substantiation insofar as the final decision is built throughout that process with the participation of the taxpayer".

The procedural/processual context is thus not indifferent for assessing in concreto the adequacy of the substantiation produced. As concluded in another arbitration award, "The hypothesis of the existence of nullity for lack of substantiation should, from the outset, be ruled out, given that the existence of an administrative proceeding with the attachment of probative elements, functioning of the right to be heard, substantiation, conclusions [...] is quite evident. That is, all the decisional orders that led to the contested assessment or to the confirmation of its correctness were preceded by information from the services containing all the necessary grounds, of fact and of law, for the full understanding of how the value was calculated [§] Thus, it is verified that the act was practiced in a procedural context capable of allowing its recipient to know the reasons of fact and of law [...] ".

Hence the firm understanding in arbitration case law itself that the reference to "succinct exposition" in art. 77th, 1 is to be taken literally: "what matters is that, even if briefly or in summary form, the premises of the act are known and all the determining reasons of the resolution content are referred to"

The same reasons of economy and rationality of means, added to the awareness that substantiation goes, not rarely, densifying "dialogically" throughout the process, have led jurisprudence to recognize that excessively detailed substantiation can be the opposite of that which is teleologically aimed at with true substantiation – dispensing with minutiae even where they would notoriously not contribute anymore to the sharing of information between administration and taxpayers, in a sort of "decreasing marginal return" effect of the information itself. Hence the reference to principles, to regimes, or to normative frameworks, can dispense with the complete enumeration of everything that corresponds to those principles or to those regimes or to those normative frameworks.

"In PIT assessment acts, given their nature as a 'mass process', the duty of substantiation is fulfilled by the Tax Administration in a 'standardized' and 'computerized' manner, but without being able to fail to observe the provision of no. 2 of article 77th of the General Tax Code or to call into question the purposes of the right to substantiation." .

The Law itself admits it. Let us recall the enshrinement of this same principle in no. 3 of art. 153rd of the Administrative Procedure Code:

"In the resolution of matters of the same nature, any mechanical means that reproduces the grounds of the decisions may be used, provided that this does not involve a diminution of the guarantees of the interested parties."

It should be noted that, as a matter of equality of arms, knowledge of the cognitive, evaluative and volitional itinerary that culminated in the choice of the values of the assessment, and no others, is incumbent on the entity making the act, it being inconceivable that it should fall to the taxpayer the burden of enunciating himself the arguments substantiating the contested act, in order subsequently to be able to accept or contradict them: this the sense of the duty of substantiation enshrined generically in art. 268th of the Constitution and in art. 77th of the General Tax Code.

In return, it cannot fail to be taken into account that the discernment of the concrete recipient of the substantiation is an element to be weighed to assess whether or not the substantiation provided him, to him in particular and in those precise circumstances – and no others more remote or abstract – the formulation of a conscious judgment on the advisability of accepting or contesting, graciously or contentiously, the act.

In truth, substantiation also involves an assessment of its efficacy, or that is, by the "impression of the recipient" – not in the sense of it dispensing with the verification of the objective requirements of its verification (even because, let us recall, it is not only the protection of the interests of the recipient, the "guaranteeing function" of substantiation, that is at stake, but also the very transparency and objective correctness of the decision-making process, the "endogenous function" of substantiation), nor in the sense of an psychologist remission to an inquiry into the subjective states of conviction of the recipient (which would be impossible), but rather in the sense that this substantiation must have its respective clarity assessed by the standard of the average declaratee or the concrete declaratee if this has more information than the average declaratee – as follows from the general principle enshrined in art. 236th, 1 and 2, of the Civil Code.

It is moreover, in our understanding, this general principle of the "impression of the recipient" that confers autonomy on the formal question of substantiation, which is essentially a question of access to information relating to the reasons that led the Administration to act as it did, the reasons on which it based its action – and which must be separated from that other material dimension of substantiation, which refers to the substantial validity of the act, relating to the correspondence of these reasons to reality, and the sufficiency of that correspondence to legitimate the concrete administrative action.

It being on the formal plane – demarcating it in turn from the issue of notification, which must not be confused with it – that one inquires autonomously about the fulfillment of the duty of substantiation, remitting the material issues for consideration of the merits.

As established in lapidary fashion in an arbitration award, "In the case under consideration, it is verified that the Respondent Tax Authority made known, through the inspection report, the substantiation for which, in the perspective of that authority, the Claimant could not but include in the taxable value for VAT purposes the value relating to the grant in question. [§] Now, from the content of the inspection report that underlies the VAT assessment and compensatory interest, there result expressly, sufficiently and congruently the reasons of fact and of law on which such positioning of the Tax Authority is based. [§] Whether these assumptions and reasons contributed by the Tax Authority to the inspection report are or are not substantively valid is a question that has to do with the merits and no longer with the form and which, therefore, is placed in another dimension from which it does not fall to us to know, on this point. [§] In this case, it is evident the criterion (rightly or wrongly) followed by the Tax Authority." .

Let us admit, in return, that it would not be reasonable to infer from it that every juridical reaction of the taxpayer would reveal, ipso facto, the "impression of the recipient" demonstrative of the sufficiency of the substantiation – even for the elementary reason that understanding a substantiation is not accepting that substantiation, nor even considering it true, adequate or complete.

As has already been observed in arbitration proceedings, "This argument, as presented, fails and could even lead, in theory, to the inadmissibility of the invocation (or the irrelevance of the consideration) of the defect of lack of substantiation of the acts should the taxpayer resort to the Courts (whether arbitral or judicial). The fact that a request for pronouncement is presented does not in itself allow it to be demonstrated that the act was duly substantiated" .

However, in accordance with the general principle of the relevance of knowledge, by the declaratee, of the real will of the declarant, as established in no. 2 of art. 236th of the Civil Code, it cannot be legally indifferent, for the assessment of the sufficiency of the substantiation, the conduct of the declaratee that is revelatory of the concrete, real, contextual understanding of what was transmitted together with the decision.

Doctrine affirms it, accepting that the duty of substantiation is fulfilled if, by the position it takes and arguments it uses, it is evident that the taxpayer has grasped the reasons or motivations, of fact and of law, of the author of the act.

It is the "impression of the recipient", to borrow the civilistic category, that is in question in this criterion of weighing as to the fulfillment of the requirements of substantiation, at least in its "guaranteeing" teleology; and this is perfectly reflected in the canonical formula of superior court jurisprudence: "According to the uniform jurisprudence of this STA, and bearing in mind the functionality of the institute of substantiation of administrative acts, that is, the instrumental end that it pursues, an act shall be duly substantiated whenever a normal recipient can become aware of the sense of that same decision and the reasons that sustain it, allowing him to grasp the cognitive and evaluative itinerary followed by the administrative entity, and opt consciously between accepting the act or activating the legal means of contest" .

In sum, and for the reasons that precede, we have that the tax acts contested in the present proceedings do not suffer from lack of substantiation.

IV.2.3. Violation of the principle of thorough inquiry

In some way, the understanding on this point follows from what was established in the previous point: if we conclude that the Inspection Report is detailed and complete in the demonstrations and calculations, and that from it we could even infer the fulfillment of the duty established in art. 58th of the General Tax Code regarding the performance of "all necessary measures (...) for the discovery of material truth", then it is because the duty established in art. 58th of the General Tax Code was fulfilled as to the performance of all the necessary procedures to discover the material truth, and no procedural vice of omission of inspection acts occurred that specifically resulted in disregard for the justifications presented by the Claimant, or conflict with these justifications, or did not manage to go beyond the level of mere suspicions.

It is clear from the Inspection Report and from the other documentation attached to the Request for Pronouncement, and from the Administrative File attached to the Respondent's Response, that the managing partner of the Claimant and the spouse of that managing partner were repeatedly requested to provide clarifications, and abundant documentation was gathered, not only relating to the Claimant but also to entities that maintained relations with the Claimant.

Not all the information provided was credible and conclusive, but it is not apparent that this should be due to a violation of the principle of thorough inquiry, rather it seems to be due to inaccuracies, obscurities and omissions in documentation and accounting that the documentation itself attached to the file evidences.

In sum, no violation of the principle of thorough inquiry is apparent.

IV.2.4. Incorrect requalification of tax facts

As to the allegation that there was erroneous qualification of income, let us divide the facts relating to "distribution of profits", on the one hand, from the facts relating to "subsistence allowances", on the other.

Regarding the "distribution of profits", facts were determined such as irregularities identified in the company's financial circuits, a very significant number of movements identified in the analysis of the accounts held by the managing partner and spouse, as being associated with the Claimant, or the lack of credible substantiation of the few justifications presented for the various cash deposits and transfers, identified in the private accounts, demonstrative that they related to funds from income from the activity of the Claimant, but which were omitted from the financial statements and for tax purposes.

As a result of this determination of facts, the determined amounts, added to the declared income of the years 2012 to 2015, resulted from the sum of the credits shown monthly in the private bank accounts held by the couple (managing partner and spouse), whose origin was not justified, it being verified that the amounts were not estimated or presumed, whereby the conditions provided for in art. 87th of the General Tax Code, necessary for the realization of indirect assessment, were not met.

By virtue of the presumptions relating to income of Category E, it was incumbent on the managing partner of the Claimant to prove that the facts determined did not correspond to "entries made in his favor (...) made as distributed profits or advances on profits" (art. 6th, 4 of the PIT Code). As this proof was not made, it comes to be considered that there was indeed "distribution of profits" and that withholding at source, as imposed by art. 71st, 1, a) of the PIT Code, did not occur.

Regarding the "subsistence allowances", again it results from the proven factual matter that there was a perversion of the nature of these so-called "subsistence allowances", which came to serve as means of monthly remuneration by the Claimant, constituting "salary supplements" of the Claimant's employees, in addition to not having been, even in their qualification as "subsistence allowances", subject to withholding at source of PIT in the amounts owed by law, including the withholding resulting from the application of the 3.5% surcharge, as stated in art. 187th, 5, of Law no. 66-B/2012 (State Budget 2013).

Thus, it being proven that the Claimant had paid dependent work income, of Category A, which it incorrectly qualified as "subsistence allowances" – also by exceeding the limits established in art. 2nd, 3, d) of the PIT Code – it was necessary to conclude that the corresponding declarations had been omitted, and the withholdings at source that were owed, in accordance with article 99th of the PIT Code; the Claimant assuming, as a tax substitute who should have proceeded with withholding, (joint and several) liability for the tax not withheld, in accordance with art. 103rd, 4 of the PIT Code.

In sum, the proven factual matter demonstrates that the contested assessments were not based on incorrect requalification of the tax facts.

V. Decision

In view of all the foregoing, it is decided:

To judge the request for arbitral pronouncement of declaration of illegality of the acts of additional assessment of PIT and compensatory interest that are the subject of the file, presented to the Claimant and relating to the years 2012, 2013, 2014 and 2015, as totally without merit.

VI. Value of the process

The value of the process is fixed at €324,632.58, in accordance with the provision of art. 97th-A of the Civil Procedure Code on Tax Matters, applicable ex vi art. 29th, no. 1, lit. a), of the LRATM and art. 3rd, no. 2, of the Costs Regulation in Tax Arbitration Proceedings (CRTAT).

VII. Costs

Costs charged to the Claimant, given that the present request was judged without merit, in the amount of €5,508.00, in accordance with Table I of the CRTAT, and in compliance with the provisions of articles 12th, no. 2, and 22nd, no. 4, both of the LRATM.

Lisbon, 26 November 2018

The Arbitrators

José Poças Falcão
(President)

Sofia Ricardo Borges
(Member)

Fernando Araújo
(Member)