Summary
Full Decision
ARBITRAL DECISION
I. REPORT
1. A..., also using A..., with tax domicile at Rua ... no. ..., ..., ...-... Lisbon, tax identification number..., hereinafter referred to as the "Claimant", requests, pursuant to subparagraph a) of paragraph 1 of Article 2 and Article 10, both of Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT"), the constitution of an arbitral tribunal and submits a request for arbitral pronouncement, which has as its object the assessment of Income Tax on Individual Income ("IRS") no. 2015..., issued on 11 August 2015, relating to the year 2014, in the amount of €51,457.00, with a view to the declaration of illegality and consequent annulment thereof, in which the Tax and Customs Authority (hereinafter referred to as the "Respondent" or "TA") is the respondent.
2. The request for constitution of an arbitral tribunal was accepted by the Honourable President of the CAAD and notified to the Respondent on 11 April 2016.
3. The Claimant chose not to designate an arbitrator; accordingly, pursuant to paragraph 1 of Article 6 and paragraph 1 of Article 11 of the RJAT, the Deontological Council appointed the undersigned as arbitrator of the sole arbitral tribunal, who accepted the appointment within the legally prescribed period.
4. The parties were duly notified of the appointment on 27 May 2016 and did not manifest an intention to refuse it.
5. In compliance with subparagraph c) of paragraph 1 of Article 11 of the RJAT, the sole arbitral tribunal was constituted on 14 June 2016.
6. The Respondent was notified on 17 June 2016 of the order issued by the arbitral tribunal on 14 June 2016, pursuant to paragraph 1 of Article 17 of the RJAT, to present a response, request the production of additional evidence, and remit the administrative record.
7. The Respondent submitted its response to the record on 2 September 2016, in which it maintained the legality of the assessment, on the ground of the Claimant's failure to demonstrate the origin and nature of the income earned in 2014, concluding that the claim should be entirely rejected with the consequent dismissal thereof. The Respondent further refuted the existence of the defect of lack of reasoning alleged by the Claimant and likewise contested the allegation of the defect of violation of the right to information, arguing the lack of jurisdiction of the arbitral tribunal to analyse the same, which, being a dilatory exception, would determine the dismissal of the Respondent in this respect. The Respondent further requested the dispensation of witness evidence, considering it unnecessary and procedurally futile. In the event such dispensation were not accepted, the Respondent requested that the Claimant be notified to indicate the facts contained in the request for arbitral pronouncement upon which the production of witness evidence would be directed.
8. By order of the arbitral tribunal notified to the parties on 14 September 2016, the Claimant was given a period of 10 days in which to indicate the facts upon which witness evidence would be directed, and the Respondent was requested to submit to the record legible copies of the administrative record.
9. The Respondent submitted copies of the requested administrative record to the record on 15 September 2016.
10. On 27 September 2016, the Claimant submitted to the record an indication of the facts upon which witness evidence should be directed, as well as a request for the submission of copies of the income declarations for the year 2014 presented in France, evidencing the origin and nature of the income declared in Annex J of Model 3 of the IRS, noting that the same did not correspond to capital income as provided in paragraph 13 of Article 71 and paragraph 2 of Article 72 of the IRS Code. It further stated that the corresponding field of the declaration had been filled in because the TA's computer system did not allow the filling in of another field, as had been suggested to it by the TA.
11. The arbitral tribunal scheduled 12 October 2016, at 14:30 hours, for the purposes of holding the first hearing, pursuant to Article 18 of the RJAT. It further indicated that at the said hearing the examination of the witness summoned would take place, followed by oral arguments, if necessary, pursuant to paragraph 2 of Article 18 of the RJAT. The Claimant was also requested to submit to the record, by the date of the holding of the hearing, a Portuguese translation of the income declarations presented in France, the submission of which to the record was being requested by the Claimant.
12. The scheduling of the first hearing was changed to 18 October 2016 at the request of the Illustrious Representative of the Claimant, as shown in the order of 30 September 2016.
13. Following the request submitted by the Respondent, the arbitral tribunal gave the Claimant a period of 10 days to present the Portuguese translation of the income declarations presented by the Claimant in France in the year 2014, and, in accordance with the principle of fair process, the Respondent was granted a period of 10 days to make submissions thereon, the first hearing being rescheduled for 11 November 2016, at 14:30 hours, as shown in the order of the arbitral tribunal notified on 7 October 2016.
14. At the request of the Illustrious Representative of the Claimant, due to overlapping judicial proceedings, the first hearing was postponed to 15 November 2016, at 14:30 hours, as shown in the order of the arbitral tribunal notified on 17 October 2016.
15. On 17 October 2016, the Claimant submitted to the record the Portuguese translation of the income declarations for 2014 presented in France and indicated the articles of the request for arbitral pronouncement upon which witness evidence would be directed: articles 13, 14, 15, 17, 20, 21, and 23.
16. The Respondent made submissions on 2 November 2016 regarding the submission of the income declarations for 2014 presented by the Claimant in France, having, in summary, concluded that the Claimant's income earned in France was category B income, which should have been entered in field 403 of Annex J of Model 3, refuting the alleged impossibility of correct completion of the declaration, and, considering that the IRS assessment at issue resulted from what was self-declared by the Claimant, there was no error attributable to the TA's services.
17. On 15 November 2016, at 14:30 hours, the hearing provided for in Article 18 of the RJAT took place at the headquarters of the CAAD, Avenida Duque de Loulé no. 72-A, Lisbon.
18. At the said hearing, the production of witness evidence took place, with the witness summoned by the Claimant, Dr. B..., giving testimony on the facts contained in the request for arbitral pronouncement, referred to above.
19. The witness stated that the impossibility of the Claimant completing field 403 of Annex J of model declaration 3 of the IRS arose from the fact that the Claimant had not commenced activity in Portugal. Faced with this new fact, the Respondent requested of the arbitral tribunal a period to make submissions thereon, and the arbitral tribunal granted a period of 10 days for the same to make submissions and an equal period of view for the Claimant, counting from the respective notification.
20. The Arbitral Tribunal further fixed a period of 10 successive days, counting from the end of the period of view of the Claimant, for the Claimant and Respondent, in that order, to present their final submissions in writing. Having regard to the production of additional evidence, the arbitral tribunal extended the period for issuing the arbitral decision by two months, counting from the end of the period of paragraph 1 of Article 21 of the RJAT. The arbitral tribunal scheduled 13 February 2017 for the pronouncement of the arbitral decision, and the Claimant was advised that it should proceed to pay the subsequent arbitration fee in accordance with paragraph 3 of Article 4 of the Regulations of Costs in Arbitration Proceedings, and communicate payment thereof to the CAAD.
21. On 25 November 2016, the Respondent made submissions on the impossibility of completing field 403 of Annex J of model declaration 3 of the 2014 IRS arising from the fact that the Claimant had not commenced activity in Portugal, having for this purpose submitted to the record the clarification provided by e-mail by the IRS Service Directorate.
22. In turn, the Claimant, on 6 December 2016, made submissions on the clarification provided by the Respondent, having requested the submission to the record of a copy of the error in the TA's computer system ("print screen") when submitting Annex B to model declaration 3 of the IRS.
23. The Claimant presented written submissions on 16 December 2016 reiterating, in essence, the position sustained in the request for arbitral pronouncement and subsequent requests.
24. On 19 December 2016 the Respondent requested the submission to the record of the response of the IRS Service Directorate regarding the error in the TA's computer system ("print screen") when submitting Annex B to model declaration 3 of the IRS.
25. The Respondent presented written submissions on 10 January 2017, in which it maintained the position sustained in the response and subsequent requests.
II. CLAIMS OF THE PARTIES
26. To substantiate the request for arbitral pronouncement the Claimant invoked the illegality of the 2014 IRS assessment, on the basis of:
a) Erroneous qualification and quantification of income, pursuant to subparagraph a) of Article 99, insofar as the income was obtained in France and is exempt from tax in Portugal, by virtue of the non-habitual resident status which the Claimant has enjoyed since 2014, inclusive, and double taxation, given that the same income was declared and taxed in France.
b) Lack of reasoning of the assessment insofar as the same does not comply with the provisions of paragraph 2 of Article 77 of the General Tax Law ("LGT"), as it does not contain the qualification and quantification of the tax facts and the operations for determining the taxable base and the tax.
c) Violation of the right to information of the taxpayer, provided for in Article 67, paragraph 2 of the LGT.
27. The Respondent presented a response sustaining the legality of the 2014 IRS assessment above identified, invoking, inter alia, the following:
a) The Claimant did not submit supporting documents of the income entered in field 424 of Annex J of the income declaration Model 3 which would have made it possible to verify its origin and nature, it being impossible to contradict what was declared in that field of the income declaration, nor, consequently, to invalidate the assessment conducted by the TA on the basis of that same declaration, whereby the IRS assessment disputed should be maintained, the request for arbitral pronouncement being entirely rejected;
b) Considering the act of assessment and collection, the TA fully complied with the legal requirements for reasoning the acts referred to in paragraph 2 of Article 77 of the LGT and 125 of the Administrative Procedure Code ("CPA");
c) The violation of the right to information invoked by the Claimant does not concern the legality of the act of IRS assessment, there being a (dilatory) exception embodied in the lack of material jurisdiction of the arbitral tribunal, which determines the dismissal of the Respondent in this instance, in this respect, pursuant to subparagraph e) of paragraph 1 of Article 278, Article 576 and 577, all of the Civil Procedure Code in force, applicable ex vi Article 29, paragraph 1, subparagraph e) of Decree-Law no. 10/2011, of 20 January.
28. Following the Respondent's response, the Claimant requested the submission to the record of the income declarations for the year 2014 presented in France, clarifying that the same relate to non-commercial professional income and not to capital income referred to in paragraph 13 of Article 71 and paragraph 2 of Article 72 of the IRS Code, clarifying that the corresponding field of the income declaration had been filled in because the TA's computer system did not allow the filling in of another field, as suggested by the TA. Whereby, and in light of a principle of substance over form and material justice in tax matters, the IRS assessment object of this case should be annulled, on pain of the Claimant being subjected to a manifestly excessive and disproportionate taxation.
29. Faced with the above request and the documentation submitted to the record by the Claimant, the Respondent set forth, summarily, the following:
a) It is found that there is income from the exercise of the activity of architect (€47,020.00) and capital gains equally generated by the cessation of that activity on 30/09/2014 (€100,000.00), declared in France, such income being to be regarded as category B income, pursuant to Article 3, paragraph 1, subparagraph b) of the IRS Code and subparagraph c) of paragraph 2 of that Article 3, and not as category E income (capital income), as previously mentioned in Article 17 of the arbitral request by the Claimant.
b) Accordingly, the Claimant should have entered the income in field 403 of Annex J of Model 3 of the 2014 income year, and the existence of a fixed establishment should have been mentioned on the reverse of Annex J, as well as the completion of Annex B or C, relating to that type of independent work income.
c) The assessment at issue results strictly from what was self-declared by the Claimant, there being no error attributable to the TA's services, which has repercussions, both at the level of the right to compensatory interest, and at the level of compensation for undue security, inasmuch as there is no legal basis for such claims, in light of the absence of error attributable to the services.
d) The Claimant should be condemned to costs to the extent that the arbitral decision comes to be based on facts the proof of which was offered by the Claimant only in the arbitral instance.
30. The Claimant and the Respondent maintained in essence the claims set out above in the written submissions.
III. PRELIMINARY DETERMINATION
31. The present Arbitral Tribunal was regularly constituted and is competent to appreciate the matters indicated (subparagraph a) of paragraph 1 of Article 2 of the RJAT), the parties enjoy legal capacity and have legal standing (Articles 4 and paragraph 2 of 10 of the RJAT and Article 1 of Ordinance no. 112-A/2011, of 22 March).
32. With regard to the timeliness of the present initial petition, as the Claimant presented an administrative complaint of the tax act on 4 September 2015 with the competent tax authority, and there was no response from the TA, it is presumed to be dismissed within a period of 4 months, for the purpose of contentious review or judicial challenge, in accordance with the provisions of paragraph 1 and paragraph 5 of Article 57 of the LGT and 106 of the CPPT. In such terms, the period for submission of this request, taking into account the provisions of subparagraph a) of paragraph 1 of Article 10, paragraph 1 of the RJAT, ended on 4 April 2016.
33. As this initial petition was presented on 29 March 2016, the same is timely.
34. A preliminary issue was raised by the Respondent – the lack of jurisdiction of the arbitral tribunal to rule on the violation of the right to information – which will be analysed in the decision section, after the establishment of the facts found to be proven.
35. There are no other nullities, nor were other exceptions or preliminary issues raised by the parties that should be analysed immediately, whereby nothing prevents the judgment on the merits.
IV. FACTS
A. Facts Found to be Proven
36. With relevance to the decision of the case, the following facts are found to be proven.
a) The Claimant requested non-habitual resident status in Portugal, which was granted to it by the TA for the period from 2014, inclusive, to 2023.
b) With respect to the year 2014, the income declaration Model 3 was presented on 29 May 2015.
c) In the said income declaration Model 3, field 424 was completed in Annex J – capital income referred to in paragraph 13 of Article 71 and paragraph 12 of Article 72 of the IRS Code – with the amount of €147,020.00, as income earned, and the amount of €41,695.67, as tax paid abroad.
d) In addition to the information in field 424, field 601 of Annex J was also entered with the identification of the country of origin of the income (250 – France), the amount of income earned and the amount of tax paid abroad:
e) In Annex L of the income declaration (Non-habitual resident) the exemption method option was indicated in table 6B ("Income obtained abroad – Elimination of international double taxation"):
f) According to the income declarations for the year 2014 presented in France, the Portuguese translation of which was submitted to the record by the Claimant on 7 October 2016, the same earned professional non-commercial income in France, in the total amount of €147,200.00, corresponding to income from the exercise of the activity of architect (€47,020.00) and capital gains generated by the cessation of the activity on 30/09/2014 (€100,000.00).
g) The Claimant thus earned, in the year 2014, professional non-commercial income in France, derived from his professional activity as an architect, described above, which was taxed there.
h) The Claimant did not present a declaration of commencement of activity for the purposes of the exercise of independent professional activity (category B) in Portugal.
i) The Claimant did not complete field 403 – Independent Work – of Annex J of the IRS Model Declaration 3, because the same generated an error in the completion of the declaration:
j) In accordance with the clarifications provided by the IRS Service Directorate, the above error resulted from computer validation performed at the time of submission of the declaration, which, when the independent work income declaration was entered in field 403 of Annex J, alerted to the failure to complete the respective Annex B or C, relating to that type of income. The said error did not imply the obligation to complete Annex B, when such independent professional income was declared in Annex J.
k) Following the submission of the said declaration completed in the terms described above in c), d) and e), there was issued on 11 August 2015 the IRS assessment no. 2015..., in the amount of €51,457.00, as tax relating to autonomous taxation:
l) Not being satisfied with this assessment, the Claimant presented an administrative complaint with the Lisbon tax authority –..., on 4 September 2015, having invoked the following grounds:
m) On 11 October 2015 a postal notice was sent regarding the commencement of a tax execution procedure for collection of the IRS debt for 2014, in the amount of €51,457.00, plus default interest (€69.48).
n) The Claimant requested on 29 October 2015 from the Lisbon tax authority –... information on the status of the administrative complaint process and the expected date of response, as the amount of €51,773.14 was being forcibly collected.
o) On 9 November 2015 the Claimant filed an objection to the tax execution of the IRS assessment no. 2015..., pursuant to Article 204 of the CPPT, on the ground of non-existence of tax, illegality of the assessment for lack of reasoning of the same and for not having received a response regarding the status and expected date of response to the administrative complaint presented on 4 September 2015.
p) The Claimant filed a complaint against the Respondent with the Ombudsman:
q) On 29 March 2016, the Claimant presented this request for constitution of the arbitral tribunal/request for arbitral pronouncement.
B. Facts Not Proven
37. There are no other facts with relevance to the decision that have not been found to be proven.
C. Reasoning for Facts Proven and Not Proven
38. The Tribunal's conviction regarding the facts found to be proven resulted from the full examination of the documents submitted to the record, as well as from the appreciation of the contents of the pleadings and the administrative record likewise submitted to the record.
V. ISSUE TO BE DECIDED
39. The main issue presented to the tribunal is to decide whether the income earned by the Claimant in 2014 fell or did not fall within the tax exemption scheme provided for non-habitual residents, pursuant to the provisions of Article 81 of the IRS Code.
VI. LEGAL REASONING
A. Defect of Violation of the Right to Information
The Claimant alleges the illegality of the act of assessment on the basis of the defect of violation of the right to information of the taxpayer provided for in paragraph 2 of Article 67 of the LGT.
Indeed, the right to information is constitutionally provided for in paragraph 1 of Article 268 of the CRP, and its scope is regulated in Article 67 of the LGT, with the TA being obliged to provide information within a period of 10 days.
However, even though the omissive conduct of the TA is reprehensible, namely in the failure to provide information on the status of the administrative complaint process, the same cannot be reflected in the validity of the act of assessment.
Accordingly, the violation of the said right to information will not be attributable to the assessment act disputed, as is alleged by the Respondent.
In this measure, as the illegality of the assessment is not at issue, there is a (dilatory) exception embodied in the lack of material jurisdiction of the arbitral tribunal, which determines the dismissal of the Respondent in this instance, in this respect, considering the provisions of subparagraph e) of paragraph 1 of Article 278, Articles 576 and 577, all of the Civil Procedure Code in force, applicable ex vi Article 29, paragraph 1, subparagraph e) of Decree-Law no. 10/2011, of 20 January.
B. Defect of Lack of Reasoning of the Assessment
The Claimant further invokes, as a cause of illegality of the act of assessment, the defect of lack of reasoning, as the same does not comply with the provisions of paragraph 2 of Article 77 of the LGT, as it does not contain the qualification and quantification of the tax facts and the operations for determining the taxable base and the tax, which also constitutes a ground for challenging the assessment, pursuant to the provisions of subparagraph c) of Article 99 of the CPPT.
The duty to reason the decision is a constitutional requirement (paragraph 3 of Article 268 of the CRP), implemented, inter alia, by the provisions of Article 77 of the LGT.
Article 77 enshrines the duty to reason tax acts "by means of a brief exposition of the reasons of fact and of law that motivated it, the reasoning being able to consist of a mere declaration of agreement with the grounds of previous opinions, information or proposals, including those forming part of the report of the tax audit".
Being that, pursuant to paragraph 2 of the same provision, "The reasoning of tax acts may be carried out in a summary form, and must always contain the applicable legal provisions, the qualification and quantification of the tax facts and the operations for determining the taxable base and the tax".
However, as Rui Duarte Morais teaches, "The reasoning of the act must, further, be accessible (...). The reasoning must, further, be exhaustive, that is, it must allege the verification of all the presuppositions on which the law makes the legality of the act in question dependent. (...) The content, the depth required of the reasoning, necessarily depends on the specific case. It is normally affirmed that the reasoning must be express, clear, congruent and sufficient. What is required is – using a common saying of our case law – that the reasoning permit a normal recipient to understand the cognitive and evaluative itinerary contained in the act, so that it becomes clear the reason why it was decided thus and not in another way. (...) This will consist, essentially, in the demonstration of the verification in the specific case of the hypothesis of the legal rule, there being no place for motivation of the concrete content of the decision (the explanation of the reasons why it was decided in this way and not in another), since, as a rule, the decision (the only possible one) to be taken results directly from the law. Hence the express provision, in paragraph 2 of Article 77 of the LGT of simplified reasoning".[1][2]
Similar to what is cited by this author, to distinguish the tax acts in which simplified reasoning is admissible from the situations in which the law enshrines the obligation of reasoning with "special density" as are those provided for in paragraphs 3 to 5 of Article 77 of the LGT, the Decision of the SAT of 17-06-2009 in case no. 0246/09 is transcribed: "In acts of assessment of IRS, given their nature as a 'mass process', the duty to reason is fulfilled by the tax administration in a 'standardised' and 'computerised' manner, but without being able to disregard the provisions of paragraph 2 of Article 77 of the LGT or to put into question the purposes of the right to reasoning."[3]
In the same sense as the cited decision, see the Decision of the SAT of 14-02-2013 in case no. 645/12, which is transcribed below: "Tax law, in the implementation it makes of the right constitutionally guaranteed to reasoning of administrative acts (Article 268, paragraph 3 of the Constitution of the Republic), specifically admits that it be done in a summary form, provided that it contains the applicable legal provisions, the qualification and quantification of the tax facts and the operations for determining the taxable base and the tax, equally admitting that it be done by reference (cfr. paragraphs 1 and 2 of Article 77 of the LGT), this duty being most often fulfilled by the tax administration in a 'standardised' and 'computerised' manner, given the nature of 'mass process' of modern tax management (cfr. J.L. Saldanha Sanches/João Taborda da Gama, 'Hearing-Participation-Reasoning: the co-responsibility of the subject in the tax decision', in Tribute to José Guilherme Xavier de Basto, Coimbra, 2006, pp. 290/297 and J.L. Saldanha Sanches, The Quantification of the Tax Obligation: Duties of Cooperation, Self-Assessment and Administrative Assessment, Lisbon, 1995, pp. 189/202). Essential is that the ultimate purposes of the requirement for reasoning are not frustrated: rationality of the decision and the creation of the material conditions for the adequate exercise of the rights of defence by taxpayers (...)."[4][5]
However, the defect of lack of reasoning invoked does not confuse with the duty of communication of the grounds. Indeed, the defect of lack of reasoning constitutes a defect capable of determining the annulment of the act, while the non-performance or defective performance of the duty to communicate the reasoning determines a defect of notification of the act.
In cases of insufficient notification, a mechanism for remedying its deficiencies is provided for in paragraph 1 of Article 37 of the CPPT, which allows the Claimant to "request notification of the requirements that have been omitted or a certified copy containing them, free of any payment", which was not used by the Claimant.
Being that, as results from paragraph 6 of Article 77 of the LGT, the communication of the act of assessment is only a condition of its effectiveness.
Citing for all the Decision of the SAT of 16-11-2016 in case no. 0954/16, "As this Supreme Administrative Tribunal has been saying, one thing is the reasoning of the act and another is the communication of those grounds to the interested party: while the former constitutes a defect capable of determining the annulment of the act that suffers from it, the non-performance or defective performance of the duty to communicate the grounds cannot be reflected in the validity of the act being communicated (See, among many others, the following decisions of the Section of Tax Litigation of the Supreme Administrative Tribunal:- of 3 May 2006, issued in case no. 54/06, published in the Appendix to the Diário da República of 26 October 2006 (http://www.dre.pt/pdfgratisac/2006/32220.pdf), pages 692 to 695, also available at - of 15 February 2012, issued in case no. 872/11, published in the Appendix to the Diário da República of 18 April 2013 (http://www.dre.pt/pdfgratisac/2012/32210.pdf), pages 412 to 419, also available at http://www.dgsi.pt/jsta.nsf/35fbbbf22e1bb1e680256f8e003ea931/1bbaeac622479cd0802579b90042a6f9.). The duty to communicate the grounds is not identified or confused with the duty to reason. As VIEIRA DE ANDRADE states, 'one thing will be to allow the reasons for the decision to be known from the outside, another thing will be to bring the knowledge of them to the outside' (The Duty of Express Reasoning of Administrative Acts, Almedina, 1991, page 47.). This is why problems existing regarding the non-performance or defective performance of the duty to communicate the grounds cannot be reflected in the validity of the act being communicated. In our system, any deficiencies that the notification presents only affect the effectiveness of the act being notified and not its perfection or validity, as results from paragraph 6 of Article 77 of the LGT, the communication of the act constitutive of duties and obligations is only a condition of effectiveness (For fuller development on the distinction between the act of notification and the notified act, see JORGE LOPES DE SOUSA, Code of Tax Procedure and Process Annotated and Commented, Áreas Publishing, 6th edition, volume I, annotation 3 a) to Article 37, pages 349 to 351.)".
Accordingly, faced with the act of assessment of 2014 IRS of the Claimant, it is necessary to ascertain whether the TA fulfilled the duty of reasoning provided for in paragraph 2 of Article 77 of the LGT.
As noted by the Respondent in the Response, the act of assessment of IRS is document no. 1 submitted with the Response and not document no. 7 submitted with the request for arbitral pronouncement, which is a mere demonstration of assessment.
In this regard, faced with an act of assessment of IRS, given its nature as a "mass process" or "mass act", the simplification of the performance of the duty of reasoning is accepted, which may be fulfilled by the tax administration in a "standardised" and "computerised" manner, provided that the ultimate purposes of this requirement for reasoning are not frustrated, namely: rationality of the decision and the creation of the material conditions for the adequate exercise of the rights of defence by taxpayers.
It should further be added that, as mentioned above, for the reasoning to be sufficient, clear and precise, it should permit a normal recipient to understand the cognitive and evaluative itinerary contained in the act, so that it becomes clear the reason why it was decided thus and not in another way.
It follows from all the above that the Claimant did not see his right of defence frustrated by the manner in which the duty of reasoning was exercised by the Respondent in the IRS assessment. Indeed, for the duty of reasoning to be considered performed it is sufficient that the Claimant understood the cognitive and evaluative itinerary contained in the act, so as to be able to contest it either through the administrative complaint or through the contentious route, which came to happen both in the administrative complaint procedure and in the request for arbitral pronouncement.
Furthermore, as the Claimant did not request a certified copy regarding elements possibly omitted in the notification of the assessment, namely the "more detailed" grounds thereof, any non-performance or defective performance of the duty to communicate the tax act and its grounds cannot be reflected in the validity of that same act of assessment.
In light of the above, the defect of lack of reasoning of the assessment invoked by the Claimant is not well-founded.
C. Error in the Factual and Legal Presuppositions
As demonstrated above, the Claimant has non-habitual resident status, which was recognised for the year 2014, inclusive, until 2023.
The non-habitual resident tax scheme, in the context of IRS, was introduced into the Portuguese legal system by Decree-Law no. 249/2009, of 23 September.
At the date of the facts, the tax scheme for non-habitual residents was provided for in the provisions listed below of the IRS Code.
Accordingly, Article 16, under the heading "Tax Residence", as amended by Law no. 20/2012, of 14/05, established the following:
"(...) 6 - Non-habitual residents in Portuguese territory are considered to be those taxpayers who, becoming fiscally resident in accordance with paragraphs 1 or 2, have not been resident in Portuguese territory in any of the five preceding years.
7 - A taxpayer who is considered a non-habitual resident acquires the right to be taxed as such for a period of 10 consecutive years from the year, inclusive, of their registration as a resident in Portuguese territory.
8 - The taxpayer must request registration as a non-habitual resident at the time of registration as a resident in Portuguese territory or, subsequently, by 31 March, inclusive, of the year following that in which they become resident in that territory.
9 - The enjoyment of the right to be taxed as a non-habitual resident in each year of the period referred to in paragraph 7 depends on the taxpayer being, in that year, considered a resident in Portuguese territory.
10 - The taxpayer who has not enjoyed the right referred to in the preceding paragraph in one or more years of the period referred to in paragraph 7 may resume the enjoyment thereof in any of the remaining years of that period, from the year, inclusive, in which they again become considered a resident in Portuguese territory."
Moreover, Article 72, under the heading "Special Rates", with the wording in force at the date of the facts, established in the following paragraphs that:
"6 - The net income of categories A and B earned in activities of high added value, with scientific, artistic or technical character, to be defined by ordinance of the member of the Government responsible for the area of finance, by non-habitual residents in Portuguese territory, are taxed at the rate of 20%.
12 Are taxed autonomously at the rate of 35%:
a) Capital income, as defined in Article 5 and mentioned in subparagraphs a) and b) of paragraph 1 of the preceding article, owed by non-resident entities without permanent establishment in Portuguese territory, which are domiciled in a country, territory or region subject to a clearly more favourable tax regime, contained in a list approved by ordinance of the member of the Government responsible for the area of finance, when not subject to withholding tax in accordance with subparagraph b) of paragraph 12 of the preceding article;".
Furthermore, paragraph 4 of Article 81 of the IRS Code, with the wording in force at the date of the facts, provided that: "To non-habitual residents in Portuguese territory who obtain, abroad, category B income, earned in activities providing high added value services, with scientific, artistic or technical character, to be defined by ordinance of the member of the Government responsible for the area of finance, or derived from intellectual or industrial property, or from the provision of information regarding experience acquired in the industrial, commercial or scientific sector, as well as of categories E, F and G, the exemption method applies, it being sufficient that any of the conditions provided for in the following subparagraphs is met:
a) They may be taxed in the other contracting State, in accordance with a convention to eliminate double taxation concluded by Portugal with that State; or
b) They may be taxed in the other country, territory or region, in accordance with the OECD model convention on income and property tax, interpreted in accordance with the observations and reservations formulated by Portugal, in cases where no convention to eliminate double taxation concluded by Portugal exists, provided that those do not appear on a list approved by ordinance of the member of the Government responsible for the area of finance, relating to privileged tax regimes, clearly more favourable, and, likewise, provided that the income, by the criteria provided for in Article 18, is not to be considered obtained in Portuguese territory."
In turn, in complement to the scheme established by the IRS Code, Ordinance 12/2010 of 7 January was published, which approved the table of activities of high added value, for the purposes of the provisions of paragraph 6 of Article 72 and paragraph 4 of Article 81 of the IRS Code. According to paragraph 1 of this table, it applies to "architects, engineers and similar technicians", the code 101 being assigned to the activity pursued by architects.
From the facts proven in the present case it results that the Claimant became a non-habitual resident in Portugal in 2014, inclusive.
It was also proven that the Claimant earned in 2014 only income in France, namely:
- €47,020.00, derived from the exercise of the activity of architect;
- €100,000.00, as capital gains generated by the cessation of that same activity in France on the date of 30/09/2014;
Income, this, which was declared in France and there taxed, in accordance with the income declarations and respective Portuguese translations submitted to the record.
Accordingly, we are faced with income that is classifiable as category B income, pursuant to subparagraph b) of paragraph 1 and subparagraph c) of paragraph 2 of Article 3 of the IRS Code, and not capital income classifiable under category E, provided for in Article 5 and following of the IRS Code.
However, when submitting the IRS Model Declaration 3 for the year 2014, on 29 May 2015, the Claimant completed the following annexes:
- Annex J (income obtained abroad), indicating in field 424 the income earned and the respective tax paid abroad.
- Annex L (non-habitual resident), indicating in table 6B (income obtained abroad - elimination of international double taxation) field 3 - exemption method - for income obtained abroad and for the purposes of elimination of international double taxation.
However, it so happens that field 424 of Annex J relates to income provided for in paragraph 13 of Article 71 and paragraph 12 of Article 72 of the IRS Code, that is, capital income owed by non-resident entities domiciled in a country, territory or region subject to a clearly more favourable tax regime, contained in a list approved by ordinance of the Minister of Finance. Income, this, which could not benefit from the exemption provided for income obtained by a non-habitual resident from foreign sources, as results from subparagraph b) of Article 84 of the IRS Code.
However, it is clear from the facts proven in the present case that the Claimant did not earn in 2014 any capital income referred to in paragraph 13 of Article 71 and paragraph 12 of Article 72 of the IRS Code, the completion of field 424 of Annex J of Model 3 not corresponding to the origin (France) and nature of the income earned (professional income).
It was further demonstrated that the income earned by the Claimant in the year 2014 was professional income, to which the exemption method would be applicable, for the purposes of elimination of international double taxation.
Accordingly, pursuant to paragraph 4 of Article 81 of the IRS Code, as the Claimant earned category B income in the activity of providing high added value services (Architecture), the exemption method would apply, it being sufficient for that the income could be taxed in the other State, as admitted by the Respondent.
In light of all the above, it must be concluded that the income earned by the Claimant in France from his professional activity in 2014 was exempt from tax in Portugal, by virtue of the non-habitual resident status in Portugal which the Claimant enjoyed from 2014, inclusive.
There was thus an error or lapse in the completion of the declaration which resulted in the IRS assessment at issue.
In this respect and regarding the assessment of the completion error above, it should be recalled that, pursuant to paragraph 1 of Article 125 of the CPPT, applicable ex vi Article 29 of the RJAT, "in the judgment the judge must rule on all matters that should be appreciated, refraining from ruling on matters it should not know about".
The matters to be appreciated by the tribunal are "all matters that the parties have submitted to its appreciation, except those whose decision is prejudiced by the solution given to others; it can only concern itself with the matters raised by the parties, except if the law permits or imposes it to know of others on its own motion", as provided by paragraph 2 of Article 608 of the CPC, applicable ex vi Article 29 of the RJAT.
In this measure, the arbitral tribunal may only rule on the matters raised by the parties, Claimant or Respondent, and on matters within its own motion to know.
Accordingly, as the Respondent raised the question of whether the error in the declaration is attributable to the declarer or to the services, the arbitral tribunal will rule strictly on this matter.
The arbitral tribunal will refrain from ruling on any right to compensatory interest or compensation for undue security, given that the same were not the subject of the request for arbitral pronouncement and are not within its own motion to know.
It is now necessary to appreciate whether the said error should be attributable to the Claimant, as the Respondent contends.
In our tax legal system, namely in the context of IRS, the principle of the taxpayer's declaration applies in the determination of the taxable base, which means that it is to the taxpayer that the initial impetus in the assessment procedure falls with the filing of his declaration.
For an explanation of the scope and various aspects of this principle of declaration, in the context of IRS, we refer to the Decision of the TCAS, in case no. 01076/03, which reads as follows: "In our tax system, the principle of the taxpayer's declaration applies in the determination of the taxable base, which implies an increase in the duties of cooperation of the taxpayer with the TA, including that of maintaining an organised accounting system in accordance with commercial and tax law and that permits the determination and verification of the IRS (Articles 78 of the CPT and 38, paragraph 1, subparagraph e) of the IRS Code) and that of filing the periodic declaration of ... In paragraphs 1 and 2 of Article 76 of the CPT it was established: '1. The assessment procedure is initiated with the declarations of taxpayers or, in the absence or defect thereof, on the basis of all elements available to the competent entity. 2. The determination of the taxable base shall be made on the basis of the declarations of taxpayers, provided that they are presented in accordance with the provisions of the law and that the tax administration is provided with the essential elements for the verification of their tax situation'. To this regard, ALFREDO JOSÉ DE SOUSA and JOSÉ DA SILVA PAIXÃO consider that the declaration is an act by which the taxpayer brings to the knowledge of the Tax Administration the existence of the taxable base that forms part of the tax fact, indicating its amount and all the elements necessary for the calculation of the tax (charges, deductions, etc.). The declaration is required by law and represents an act of cooperation by the taxpayer given the public nature of the tax justified by the idea that the tax obligation is not a voluntary, contractual obligation, but the performance of a legal duty. It is a mandatory act and if the taxpayer, being in the conditions provided for by law, fails to comply with it, is subject to penalties (Articles 31 and 32 of the RJIFNA). The Portuguese tax system thus enshrines the method of the taxpayer's declaration in the determination of the taxable base (Articles 57 to 61 of the IRS Code, 16 of the CIRC and 28 to 40 of the CIVA). (...) Therefore, when the taxpayer's declaration is in accordance with the elements in their accounting records or accounts, this being organised in accordance with the law and there being no errors, inaccuracies or other founded indications that it does not correspond to reality, it is presumed that the declared taxable base is the real one. And, as results from the provisions of Article 38 of the IRS Code, the TA may only rectify the declarations of taxpayers and proceed to the corresponding additional assessment when it substantively considers that they contain a tax lower than that due".[6][7]
However, even though the principle of declaration applies in the assessment procedure, it is no less true that the said procedure culminates with the issuance of the assessment or tax act par excellence, which is the responsibility of the TA.
Indeed, contrary to "self-assessed" taxes, "IRS is a 'heteroliquidable' tax, with assessment being the responsibility of the DGCI (Article 75)".[8]
Therefore, the competence for assessment, in the strict sense, is not that of the taxpayer, despite the procedure beginning with his declaration, but that of the TA, which has, among others, the powers to request clarifications regarding the declarations presented, to make corrections in case of errors shown in the same and to correct assessments, to the extent provided for in the IRS Code.
In turn, paragraph 5 of Article 57, under the heading "Income Declaration", clarifies that: "Whenever the declarations are not considered clear or there are omissions or gaps in them, the General Directorate of Taxes notifies the taxpayers or their representatives to, in writing, and within the period set for them, not less than 5 nor more than 15 days, provide the necessary clarifications."[9]
And paragraph 4 of Article 65, under the heading "Bases for the Determination, Fixing or Amendment of Income", provides that "The General Directorate of Taxes proceeds to alter the declared elements whenever, there being no place for the fixing referred to in paragraph 2, corrections should be made arising from errors shown in the declarations themselves, from omissions made therein or corrections arising from divergence in the qualification of the acts, facts or documents with relevance to the assessment of the tax."
Accordingly, in the case at hand, there is an assessment of IRS that was issued by the TA, in accordance with a declaration presented by the Claimant, but which showed completion errors. This error resulted from the combination of what was declared in field 424 of Table 04 – capital income owed by non-resident entities domiciled in a country, territory or region subject to a clearly more favourable tax regime – with what was declared in field 601 of Table 6, both of Annex J, where the code of the country of origin of the income, the code "250", that is, France, is indicated.[10]
That is, the same income was being declared by the taxpayer in two different fields of the same Annex J as being derived from a country, territory, or region subject to a more favourable tax regime and with origin in France, whereby there was a clear divergence in the declaration, which should have prevented it from being considered validated and submitted.
However, not only was the declaration accepted by the TA, but it was taken as valid and on the basis of that same declaration the corresponding IRS assessment was issued.
Being the assessment, in the strict sense, the tax act par excellence which is the responsibility of the TA, with the said assessment the TA accepted the qualification and quantification of the income contained in the declaration presented by the taxpayer, relating to the tax year 2014.
Not having proceeded to any correction at the time of submission of the declaration, nor having requested any clarification, as was incumbent upon it under the cited provisions of the IRS Code, the services conformed to the taxpayer's declaration, transforming it into the tax assessment.
Consequently, although the assessment at issue results strictly from what was self-declared by the Claimant, the same revealed errors or lapses which could have been detected by the TA, if not in the phase of submission of the declaration, at least in the phase of issuance of the corresponding assessment, had the prerogatives deriving in particular from the provisions above identified provided for in the IRS Code been used.
Moreover, even if the errors or lapses in the declaration were not detected in the phase of submission of the declaration and subsequent issuance of the assessment, the same could have been detected in the procedure subsequent to the assessment, that is, in the administrative complaint procedure.
Indeed, faced with the issued assessment, the Claimant presented, from the outset, an administrative complaint with the competent tax authority, reiterating the origin of the income in France and requesting the application of the exemption method. However, in accordance with the facts proven in the case, the Respondent gave no response to the complaint, nor regarding the request for status of the procedure, nor even when called upon by the office of the Ombudsman, faced with a complaint directed to it by the Claimant.
Facts, these, which, as the legal period for decision of the administrative complaint passed, led to the presumption of tacit dismissal thereof and to the present request for arbitral pronouncement.
Doctrine and case law have pronounced, regarding the provisions of paragraph 5 of Article 57 of the LGT (right to compensatory interest), that, faced with the formation of a tacit act of dismissal of an administrative complaint, by the passage of the period for decision thereof, the error cannot fail to be attributable to the TA, given that the same could have issued a legal act and with its omission maintained the situation of illegality, which permits attributing to it the responsibility for the maintenance of the situation of error and undue payment.
In this regard, see the recent Decision of the SAT of 18 January 2017, which we agree with: "In fact, as Advisor Jorge Lopes de Sousa emphasises, 'In situations where the practice of the act that defines the tax debt falls to the taxpayer (as happens, in particular, in the aforementioned cases of self-assessment, withholding at source and payments on account), as well as in those where the act is practised by the Tax Administration on the basis of incorrect information provided by the taxpayer and there is place for administrative challenge (administrative complaint or hierarchical appeal), the error will become attributable to the Tax Administration after the possible dismissal of the claim presented by the taxpayer, that is, from the moment when, for the first time, the Tax Administration takes a position on the situation of the taxpayer, having at its disposal the elements necessary to issue a decision with correct presuppositions. It will be indifferent, for this purpose of attributing the error, which generates the debt for compensatory interest, whether it is a case of necessary administrative challenge or of optional, as, in either case, the decision of the challenge (administrative complaint or hierarchical appeal) is an act of the Tax Administration, whereby any error will be attributable to it from the moment it is practised. To the practice of express act should be equated, for this purpose, tacit dismissal, formed by the passage of the legal period for decision of the administrative challenge (Article 57°, paragraph 5, of the LGT), as it is this the moment when the Tax Administration should have issued a legal act and, with its omission, maintained the situation of illegality, which permits attributing to it the responsibility for the maintenance of the situation of error and undue payment.' (Jorge Lopes de Sousa, Code of Tax Procedure and Code of Tax Procedure and Process Annotated and Commented, 6th ed., vol. I, annotation 6) a) 2 to Article 61°, page 537).[11][12]
Accordingly, in the case sub judice, the TA could have made use of the powers provided for in the IRS Code to correct the errors in the assessment. Not having done so in that phase, nor subsequently, when called to decide the administrative complaint, the error in the declaration cannot be judged attributable to the taxpayer, now Claimant, but should be judged attributable to the TA, now Respondent, with all the legal consequences flowing therefrom, namely for the purposes of procedural costs.
In light of all the above, the request for the declaration of illegality of the IRS assessment of the Claimant, relating to the year 2014, on the ground of defect of violation of law, on error as to the factual and legal presuppositions, is well-founded.
VII. DECISION
Accordingly, this arbitral tribunal decides:
1. Not to rule on the defect of violation of the right to information, on the ground of the lack of jurisdiction of the sole arbitral tribunal, which determines the dismissal of the Respondent in this instance, in this respect.
2. To rule that the request for arbitral pronouncement is not well-founded insofar as the annulment of the IRS assessment, relating to the year 2014, is requested, on the ground of defect of form due to lack of reasoning;
3. To rule that the request for arbitral pronouncement is well-founded, as proven, insofar as the annulment of the IRS assessment, relating to the year 2014, is requested, on the ground of defect of violation of law as to the norm contained in the article of the IRS Code, on error as to the factual and legal presuppositions;
4. To declare the Tax Authority obliged, pursuant to subparagraph b) of paragraph 1 of Article 24 of the RJAT, to restore the situation that would have existed if the act of assessment declared illegal had not been practised, adopting the acts and operations necessary for the purpose.
5. To condemn the Respondent to costs.
VALUE OF THE CASE:
In accordance with the provisions of paragraph 2 of Article 306 of the CPC and subparagraph a) of paragraph 1 of Article 97-A of the CPPT, applicable by virtue of subparagraphs a) and b) of paragraph 1 of Article 29 of the RJAT and paragraph 2 of Article 3 of the Regulations of Costs in Tax Arbitration Proceedings (RCPTA), the value of the case is set at €51,457.00 (fifty-one thousand, four hundred and fifty-seven euros).
COSTS
Pursuant to paragraph 2 of Article 12 and paragraph 4 of Article 22, both of the RJAT, and Article 4, paragraph 4, of the cited Regulation, the amount of costs is set at €2,142.00 (two thousand, one hundred and forty-two euros), in accordance with Table I of the RCPTA, calculated as a function of the value of the claim, charged to the Respondent.
Let this arbitral decision be notified to the parties and the record be filed.
Lisbon, 6 February 2017
The Sole Arbitrator,
(Vera Figueiredo)
Text prepared by computer, pursuant to paragraph 5 of Article 131 of the Civil Procedure Code, applicable by reference from subparagraph e) of paragraph 1 of Article 29 of the RJAT, written in accordance with the spelling of the Agreement on Portuguese Language Orthography, approved by the Resolution of the Assembly of the Republic no. 26/91 and ratified by the Decree of the President of the Republic no. 43/91, both of 23 August.
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