Indirect Assessment Method in IRS: Arbitral Tribunal Competence and Inspection Repetition Rules (CAAD 198/2015-T)

ARBITRAL DECISION

CAAD: Tax Arbitration

Subject Matter: Indirect method; Jurisdiction of the arbitral tribunal; Res judicata; Repetition of external inspection procedure.

I – Report

1. On 18.03.2015, the Applicant, A..., taxpayer ID no. …, with tax domicile at Avenue … …, no. …, 1st left, in ..., requested the CAAD to constitute an arbitral tribunal, pursuant to Article 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter referred to only as "LRAT"), in which the Tax and Customs Authority is the Respondent, with a view to annulling the tax acts of assessment of Personal Income Tax (IRS) for the year 2005 and respective compensatory interest embodied in the acts of IRS assessment no. 2012 …, referring to the year 2005, assessments of compensatory interest nos. 2012 … and 2012 … and declaration of account settlement number 2012 …, from which resulted the total value payable of €43,998.90, following the decision of dismissal of hierarchical appeal filed against the decision of dismissal of grace claim previously presented with the same object.

The Applicant further alleging that she bore the total value of €49,017.39, as a consequence of having paid, in addition to the value of the assessments, default interest and costs of enforcement proceedings instituted to collect the assessed values, also petitions for the condemnation of the Respondent to pay these amounts, increased by indemnity interest on such amounts.

1. The request to constitute the arbitral tribunal was accepted by the Honorable President of CAAD and notified to the Tax and Customs Authority.

Pursuant to the provisions of Article 6, paragraph 1, of the LRAT, by decision of the President of the Deontological Council, duly communicated to the parties within the legally applicable time limits, the undersigned was appointed as arbitrator, who communicated acceptance of the appointment to the Deontological Council and to the Administrative Arbitration Center within the regularly applicable time limit.

The arbitral tribunal was constituted on 28.05.2015.

1. Verifying the non-existence of any situation provided for in Article 18, paragraph 1, of the LRAT, that would make necessary the arbitral meeting provided therein, its holding was dispensed with, on the ground of the prohibition of performing useless acts.

2. The grounds presented by the Applicant in support of her claim were, synthetically, the following:

a. The Applicant was subject to an external inspection action carried out by the services of Investigation of Fraud and Special Actions of the General Directorate of Taxes (DSIFAE), for consultation, collection and cross-checking of information, relating to the years 2005 to 2007 in compliance with Dispatches no. D1 … and D1 … issued by the Director of DSIFAE.

b. Within the scope of that inspection, the Applicant was visited by technicians of that DSIFAE on 25 June 2008, and was notified to appear at the premises of that Directorate of Services, in order, under the principle of cooperation provided for in Article 59 of the General Tax Law, and Article 34 of the Complementary Regime of Tax Inspection Procedure, to provide clarifications related to movements made in bank accounts.

c. Which the Applicant did, providing all requested clarifications and granting authorization for the lifting of banking secrecy.

d. On 25 July 2008 the Applicant was notified of the closure of the inspection procedure on 23 July.

e. By letter dated 21 April 2010, the Applicant was notified that, under Service Order no. O…/…/…, of the Tax Inspection Services of the Finance Directorate of ..., in the very short term technicians of those services would proceed to her then residence with a view to the verification of IRS relating to the years 2005, 2006 and 2007 within the scope of partial external action relating to IRS and VAT for the years 2005, 2006 and 2007.

f. Following that inspection, taxable income was fixed for the Applicant pursuant to subparagraph f) of Article 87 and paragraph 5 of Article 89-A of the General Tax Law, in the amount of €109,430.00, corresponding to deposits made to the aforementioned B… account, as the Tax Inspection Services understood that there was an unjustified discrepancy between the consumption evidenced by the aforementioned bank account and the income declared by the Applicant for the year 2005 in question, with the respective final report being notified to the Applicant on 25 November 2010.

g. Not accepting this decision, the Applicant would file an Appeal to the Tax Court of ..., which proceeded before that Court under no. .../10.2BELRS.

h. Meanwhile, the Applicant was notified by letter from the Criminal Tax Proceedings Division of the Finance Directorate of ... that she should appear on 13 October 2010 at the premises of that division to be heard as a defendant in an Inquiry proceeding, which the Applicant did, having then been constituted as a defendant.

i. In May 2005, the Applicant was notified of the decision delivered by the Tax Court of ..., in which, considering that there was no increment in the patrimony of the Applicant that would enable the Tax Authority to fix her taxable income by indirect assessment, that Court totally upheld the judicial appeal presented by the Applicant, annulling the decision fixing the taxable income.

j. Against that decision, the Finance Director of ... would file judicial appeal to the Central Administrative Court South, which, considering that the Applicant had presented the appeal provided for in paragraph 7 of Article 89-A of the LGT outside the time limit provided for in Article 146-B, of the CPPT, determined, by decision of 23 July 2012, the annulment of the decision of the Tax Court of ... and absolved the Tax Authority from the claim on the ground of untimeliness of the petition.

k. On 20 September 2012 the Applicant was notified of the IRS assessments that are the subject of this proceeding.

l. Not accepting those assessments, the Applicant presented a grace claim and, following this, hierarchical appeal to His Excellency, the Minister of Finance, which would be dismissed by dispatch of Her Excellency the Director of IRS Services dated 2 December 2014.

m. As provided for in paragraph 3 of Article 63 of the General Tax Law, at the time of the facts (now paragraph 4), "The inspection procedure and the duties of cooperation are adequate and proportionate to the objectives to be pursued, and there may be more than one external inspection procedure concerning the same taxpayer or tax obligor, tax and tax period only by decision, substantiated on the basis of new facts, of the highest director of the service, except if the inspection aims only at confirming the assumptions of rights that the taxpayer invokes before the tax authority and without prejudice to the determination of the tax situation of the taxpayer by means of inspection or inspections directed to third parties with whom the taxpayer maintains economic relations."

n. The objective of this prohibition is, first of all, to prevent a taxpayer from being burdened more than once with the inconveniences that inspection actions are capable of causing and, combining this rule with those of Article 36, paragraphs 2 and 3 of the Complementary Regime of Tax Inspection Procedure, which establish the rule of continuity of inspection and the maximum time limit for conclusion of the inspection procedure and respective extensions, it is concluded that the effects of the prohibition are amplified in the sense of assuring the taxpayer that the legal definition of his situation made following the conclusion of the external inspection procedure cannot be altered, on the basis of the same facts that were determined by the Tax Authority during the inspection.

o. In the case in question the corrections made following the inspection carried out by the Finance Service of ... are not based on any "new facts," but rather on the same exact facts regarding which the Applicant had already been heard within the scope of the procedure carried out by DSIFAE, without any judgment of censure having resulted therefrom.

p. From which it is concluded that the conduct of the Tax Authority in preparing the new inspection report and practicing the subsequent acts does not accord with such legal regime and violates the right of the Applicant not to see the legal situation defined following the inspection action altered.

q. In proceeding with the "reanalysis" of the same elements provided by the Applicant, after the first inspection procedure had been concluded, concluding in a sense diametrically opposed to what resulted from the first analysis, the services of the Tax Authority incurred in a clear and gross violation of Articles 36, paragraphs 2, 3 and 4, of the RCPIT and Article 63, paragraph 3, of the LGT, understood not only in their procedural scope, but also of the right to legal certainty that emerges from the combination of the respective regimes.

r. The violation of these norms constitutes a defect of violation of law, which necessarily repercusses on the consequent acts of fixing the taxable income and of assessment of IRS and compensatory interest, which have as their premise and ground that illegal conduct, and should therefore be annulled.

On the other hand,

s. In the wording at the time of the facts, paragraph 1 of Article 45 of the LGT provided that the right to assess taxes lapses if the assessment is not validly notified to the taxpayer within four years, when the law does not provide otherwise.

t. In turn, paragraph 4 of the same Article 45 of the LGT also provided that the said period of lapse is counted, in periodic taxes, from the end of the year in which the tax event occurred, whereby any corrective assessment should, under penalty of lapse, be notified to the Applicant by 31 December 2009.

u. And it cannot be said, as the Finance Directorate of ... intended in the defense then presented against the appeal filed by the Applicant from the decision of fixing the taxable income, that such conclusion would be prevented by the application of paragraph 5 of the said Article 45 of the LGT – added by paragraph 1 of Article 57 of Law no. 60-A/2005, of 30 December, but applicable to periods of lapse in course at the date of its entry into force by force of paragraph 2 of the same provision – which provides that whenever the right of assessment concerns facts in relation to which a criminal inquiry was instituted, the period of lapse is extended until the archiving or judgment entry of the sentence, plus one year, because, as is evident, the scope of application of the norm in question does not aim to determine the suspension of the counting of the lapse period in any circumstance in which the institution of an inquiry proceeding to a taxpayer of any tax is verified, but only to situations in which the assessment of the assumptions of the assessment of that tax is dependent on the judgment to be fixed regarding the facts to be determined in that inquiry proceeding, which follows both from the letter and the spirit of the norm in question.

v. Moreover, this is expressly referred to in the December 2005 update to the Stability and Growth Program presented by the Government that underlies the addition of the cited paragraph 5 of Article 45 of the LGT, where it can be read that the change in the regime of lapse of the right of assessment is related to "the sense of providing that, with the correct determination of the tax dependent on facts determined in a criminal inquiry, that period is extended until the archiving or judgment entry of the respective sentence, plus one year (already approved in the State Budget Law for 2006)."

w. Furthermore, the Applicant was only constituted as a defendant after the conclusion of the second inspection action, from which it is concluded that if there is any relationship of dependence between one and the other proceeding, this occurs exactly in the opposite direction to that which the law aimed to establish, with the Respondent not needing to await the outcome of the inquiry proceeding to conclude regarding its alleged tax right.

x. Whereby, it is therefore necessary to conclude that, even if the respective date is unknown, and it is admitted, for the sake of thoroughness, the institution of the criminal inquiry, at a date prior to 31 December 2009, the institution of the inquiry proceeding does not appear, in the case in question, to be determinative for the application of the rule of paragraph 5 of Article 45 of the LGT, not preventing the occurrence, on the said date, of the lapse of the right of assessment.

y. But, even if this were not the case and it were understood that the institution of the inquiry proceeding, even when not notified to the taxpayer, should have that suspensive effect, which only by strained caution and strained duty of advocacy is admitted, the same could only occur, obviously, until the date on which the tax authority chose to conclude the inspection procedure and fix the taxable income, renouncing that same suspensive effect, which occurred, in the case in question, on 6 September 2006.

z. From which it would result that, even discounting the alleged period of suspension, the notification of the assessment would always have occurred at a time later than the terminus of the legally provided period for the assessment of the tax, thus verifying, in any case, the lapse of the right of assessment of the tax.

aa. Even if for any reason it were considered that the tax assessed to the Applicant with reference to the year 2005 under challenge were due – which is only admitted by mere caution – the compensatory interest assessed and assessed together with the collection should be annulled, since, as follows from Article 35, paragraph 1, of the General Tax Law, such interest shall only be due in the case of delay in assessment when this results from any conduct or omission at fault of the taxpayer.

bb. In the case in question, fault cannot be attributed to the Applicant since the fixing of the income underlying the assessment results exclusively from the application of a legal presumption that abstracts from any conviction or judgment regarding the fault of the taxpayer, whereby it should, without further ado, be considered illegal the assessment of compensatory interest under challenge, determining its immediate annulment.

cc. Even if this were not understood, the interest in question would always prove to be excessive since from July 2008 the Respondent was in a position to assess the allegedly due tax, with the Applicant not being responsible for the fact that a reanalysis of the same elements was necessary to reach a different conclusion and two more years had elapsed.

dd. Having the Applicant paid the value of the assessments in question already within the scope of the enforcement proceeding instituted to collect such amounts, she should be reimbursed for what was unduly paid.

ee. Furthermore, as the assessment of the tax stems from manifest error attributable to the services, whose recognition is expressly requested, the Applicant still has, pursuant to Article 43, paragraph 1, of the General Tax Law, the right to indemnity interest calculated on that amount at the legal rate.

1. The ATA – Tax and Customs Authority, called upon to make a statement, contested the Applicant's claim, defending itself by exception and by impugnation, in summary, with the following grounds:

DEFENSE BY EXCEPTION

Material Absolute Incompetence

a. The defects that the Applicant invokes are defects capable of affecting the legality of the decision of the Finance Director of ... which fixed the taxable matter concerning IRS for 2005 using indirect methods.

b. This is the case with the alleged violation of the provisions of Articles 36, paragraphs 2, 3 and 4 of RCPIT, Article 63, paragraph 3 of LGT, Article 55 of LGT and Article 266 of the Constitution.

c. As well as with the lapse of the right of assessment by the passage of the time limit provided for in paragraph 1 of Article 45 of the LGT, which the Applicant understands will have terminated at a date prior to the beginning of the inspection procedure, in violation of the provision in paragraph 1 of Article 36 of RCPIT.

d. Not having the Applicant reacted in a timely manner, within the time limit expressly provided for that purpose, to the decision of fixing the taxable matter using indirect methods, as per the decision delivered by the Central Administrative Court South on 23/07/2012, which has already become final, the same became consolidated in the legal order, and the legality of the assessment act cannot now be attacked on the basis of those defects.

e. The Arbitral Tribunal cannot know of "claims relating to acts of determination of taxable matter and acts of determination of taxable income, both by indirect methods, including the decision of the review procedure," as provided in subparagraph b) of Article 2 of Regulation no. 112-A/2011, of 22.03.

f. That is, the decisions on the indirect assessment of taxable income are not included within the scope of the material jurisdiction of the Arbitral Tribunal.

g. Indeed, it follows from the request and the cause of action deduced by the Applicant that this arbitral means is intended to react against the correction made to the taxable matter concerning IRS for 2005 using indirect methods.

h. Now, the decision of assessment of taxable matter by indirect methods constitutes a separable act of the tax procedure, susceptible of reaction by taxpayers only through an appropriate means, and the assessment of tax resulting therefrom cannot be called into question through judicial impugnation or, in the case that now interests us, through a request for arbitral pronouncement, when the request and cause of action intend to attack the legality of that decision of indirect assessment of taxable matter, as, for example, is referred to in the jurisprudence set forth in the decision of the Supreme Administrative Court no. 0188/09, of 09/09/2009.

i. Thus, it results from the legal provisions previously invoked, namely the provision in Articles 2 and 4, paragraph 1, of the LRAT and Article 2 of Regulation no. 112-A/2011, of 22/03, that the Arbitral Tribunal is incompetent in reason of the matter to appreciate and decide the claim of the Applicant in all that concerns the legality of the decision of indirect assessment.

j. Considering that there are no doubts, from the above, that the claim of the now Applicant aims at appreciation of the assessment act having as ground defects capable of inquiring the inspection procedure and, consequently, the decision of indirect assessment of taxable matter.

k. It will, thus, be necessary to conclude the impossibility of the present arbitral tribunal deciding the present dispute, whether it is considered that we are before the exception of material incompetence of the arbitral tribunal or before unnamed dilatory exception due to lack of binding of the TA.

l. The incompetence of the tribunal constitutes a dilatory exception of ex officio knowledge that determines the absolution of the instance pursuant to Article 576 and subparagraph a) of Article 577 of the Civil Procedure Code (CPC) applicable by force of Article 29, paragraph 1, subparagraph e) of the LRAT, which is hereby requested.

Without Conceding,

Res Judicata

m. As is evidenced in the record, the Applicant reacted against that decision of indirect assessment of taxable matter by filing an appeal to the Tax Court of ....

n. However, by decision of the Central Administrative Court South of 23/07/2012, delivered in second instance and already final, the Applicant's filing of the appeal petition was judged to be untimely and, consequently, the right of appeal against that decision of fixing the taxable matter using indirect methods was declared extinct.

o. Thus being, the decision of indirect assessment of taxable matter became consolidated in the legal order, and the assessment resulting therefrom cannot be attacked on the ground of defects of the inspection procedure that culminated in that decision, under penalty of violation of res judicata.

p. In the terms set out above, the exception of res judicata should be judged well-founded, absolving the Respondent entity from the claim.

Without Conceding,

BY IMPUGNATION

Regarding the Principle of Non-Repetition of External Inspection Procedure

q. There does not occur, contrary to what is alleged by the Applicant, any violation of the principle of non-repetition of the tax inspection procedure, provided for in paragraphs 2, 3 and 4 of Article 36 of RCPITA, and paragraph 3 of Article 63 of the LGT, since the inspection action carried out by DSIFAE, under the dispatches DI2007 … and DI2007 …, had as its objective the mere consultation, collection and cross-checking of information, as per subparagraph a) of paragraph 4 of Article 46 of RCPIT and was intended for the prior preparation of the inspection procedure to be carried out at a later time.

r. From this simple combination of rules that govern the regime of the inspection procedure it results that the succession of this type of inspection actions is perfectly legitimate, not constituting any violation of the provision in paragraph 3 of Article 63 of the LGT.

s. Otherwise, the Respondent would be especially diminished in the prerogatives that it has to ensure the efficiency and effectiveness of its intervention in the control and verification of compliance with tax obligations.

t. After all, what paragraph 3 of Article 63 of the LGT intends is not to diminish the prerogatives of the TA but rather to ensure that the use of those prerogatives is especially infringing the guarantees of taxpayers.

u. Actions of mere consultation, collection and cross-checking of information, even if they may have the collaboration of taxpayers, do not have the prerogatives of inspection actions of an external nature, intended to carry out the control and verification of the tax situation of taxpayers, and it is with respect to these that the legislature, through paragraph 3 of Article 63 of the LGT, understood to ensure the violation of the principles of proportionality and adequacy that should guide the activity of the tax authority.

v. In sum, that action of DSIFAE was not intended to verify the legal and tax situation of the now Applicant with a view to the proposal of corrections capable of originating the assessment of tax.

w. Because this is the case, the inspection procedure carried out under Service Order 2010 …, of 14/04/2010, of the Finance Directorate of ..., did not constitute any repetition of inspection acts for purposes of paragraph 3 of Article 63 paragraph of the LGT, with no violation of this legal rule, or of the provision provided for in paragraphs 2, 3 and 4 of Article 36 of RCPITA, Article 55 of LGT or Article 266 of the Constitution.

x. In this way, it is not true that in June 2008 the Applicant was subject to an inspection action within the scope of which she made statements and her accounts were analyzed in the exact same terms that subsequently occurred in 2010.

y. In the terms set out above, the alleged violation of Articles 36, paragraphs 2, 3 and 4 of RCPIT, Article 63, paragraph 3 of LGT, Article 55 of LGT and Article 266 of the Constitution should be judged to be unfounded, absolving the Respondent entity from the claim.

Regarding the Lapse of the Right of Assessment,

z. The Applicant's thesis lacks substantiation both as to the facts and as to the interpretation of paragraph 5 of Article 45 of the General Tax Law.

aa. It results both from the literal element of the norm and from its teleological element that the introduction of this cause of suspension of the time limit for assessment of the tax is intended to prevent the TA from being prevented from assessing the tax in situations in which the time limit for lapse ends during the course of the inquiry proceeding, without the TA having access to all the elements essential for that purpose, a situation aggravated by the obstacles arising from judicial secrecy in the inquiry phase.

bb. Paragraph 5 of Article 45 of the LGT extends the time limit for assessing the tax, not preventing the TA from, until the end of that time limit, proceeding with the corrections and assessments that appear to be due, based on the elements it has at its disposal.

cc. By closing the inspection acts and concluding the inspection action, notifying the Applicant of the Final Report, the TA is not renouncing the extension of the time limit provided for in that paragraph 5, since it is not prevented from, on the ground of elements collected under the inquiry proceeding, opening an internal service order to propose further corrections to the taxable matter in IRS, with the subsequent additional assessment of tax.

dd. In the case of the records, it is evident that the right of assessment concerns facts in relation to which a criminal inquiry was instituted, since both proceedings, both the inspection action and the inquiry proceeding, aim at factual matter concerning income obtained in 2005 that unduly escaped taxation.

ee. In fact, the suspensive effect provided for in paragraph 5 of Article 45 of the LGT, by extending the time limit for lapse of the right to assess tax, ensured, on the one hand, the right of the TA to assess tax based on elements determined under the inquiry proceeding, of which it had no knowledge, and also ensured, on the other hand, the assessment of tax based on facts determined by the tax inspection within the same time limit.

ff. That was the unequivocal choice of the legislature in introducing that paragraph 5 to Article 45 of the LGT with the 2006 State Budget Law.

gg. In the terms set out above, the defect of lapse of the right of assessment should be judged to be unfounded, since at the date when the Applicant was notified of the assessment now in dispute the right of assessment had not yet lapsed, the extended time limit for which was provided in paragraph 5 of Article 45 of the LGT only to end one year after the archiving of the inquiry proceeding that occurred on 24/04/2013, and the Respondent entity should accordingly be absolved from the claim.

Regarding Compensatory Interest

hh. If the assessment in dispute remains in the legal order, as understood by the TA, the corresponding compensatory interest shall be maintained, with the Applicant's thesis failing to have a legal basis, according to which the assessment of tax resulting from the application of indirect methods does not entail the assessment of compensatory interest.

ii. In fact, and contrary to what the Applicant understands, with a legal presumption existing that is not overcome, failing to achieve the burden of proof that rests upon her, everything occurs as if the Applicant had obtained those income!

jj. It necessarily follows that IRS form 3 declaration initially filed by the Applicant omitted taxable income, which is concluded from the fact that the Applicant failed to achieve the burden of proof provided for in paragraph 3 of Article 89-A of the LGT.

kk. From the application of indirect methods it results that the delay in the assessment of the allegedly due tax is attributable to the Applicant, who did not comply with the duty incumbent upon her to declare all the income obtained.

ll. Therefore, upon the conduct of the Applicant rests a judgment of censure that justifies the assessment of compensatory interest on the amount of tax whose delay in assessment is attributable to her.

mm. The fact that the assessed tax results from a legal presumption does not eliminate the corresponding judgment of censure on the conduct of the Applicant as regards the delay in the assessment of the tax.

nn. In the terms set out above, the request for annulment of the compensatory interest assessed to the Applicant should be judged to be unfounded, absolving the Respondent entity from the claim.

Indemnity Interest

oo. Regarding the request for indemnity interest to be added to the tax unduly paid, should the Applicant's claim for annulment of the tax act in dispute come to be judged well-founded, whether by formal defect or by non-compliance with the norms governing the inspection procedure, whether by the defect of lapse of the right of assessment, it is understood that the same are not due because the requirements of paragraph 1 of Article 43 of the LGT are not met.

pp. In accordance with the provision in paragraph 1 of Article 43 of the LGT, indemnity interest is due only when there is error attributable to the services from which results payment of the tax debt in an amount exceeding that legally due.

qq. It is settled jurisprudence that the right to indemnity interest under Article 43 of the LGT presupposes the existence of error in the factual and legal assumptions on which the assessment of the tax was based, which does not occur when the assessment act impugned is annulled only by formal defect or by lack of notification of the assessment within the time limit of lapse.

1. Notified for that purpose, the Applicant responded to the exceptions raised by the Respondent, in summary, in the following terms:

a. The ATA is not correct, regarding any of the exceptions it raises.

b. In the request for arbitral pronouncement the Applicant does not put into question the content of the decision of correction of taxable matter by indirect methods, which became consolidated in the legal order following the finality of the decision of the Central Administrative Court South of 23 July 2012.

c. In no part of the arbitral Request is the value of the taxable income fixed, or defects of the respective fixing decision, put into question.

d. What the Applicant intends to see recognized, uniquely and exclusively, are formal defects inherent to the assessment act that subsume it and render it illegal.

e. Defects that could only now be invoked, both by reason of the scope of the special appeal process provided for in paragraph 7 of Article 89-A of the General Tax Law, whose sole object is the decision of assessment by resort to indirect methods, constituting in that sole measure a separable act, and in function of the principle of unified impugnation set forth in Article 54 of the Tax Procedure and Process Code.

f. This same follows unequivocally from the content of the Decision of the Constitutional Court no. 554/2009 that accompanies the appealed decision (Decision of the Supreme Administrative Court of 24.09.2008, proceeding 0342/08), which emphasizes the possibility, offered by the legal order, of the taxpayer judicially impugning the final act of assessment, which had as its premise an indirect assessment decision of taxable matter and understands that what can no longer be questioned, within the scope of judicial impugnation of the assessment, is the assessment decision, as a separable act, susceptible of immediate and autonomous judicial impugnation, pursuant to the provision in question."

g. In the case of the records, regarding the exceptions deduced, these are defects of violation of the principle of non-repetitiveness of the tax inspection procedure and defects of lapse that affect the validity of the assessment act itself under the referred principle of unified impugnation and which could not constitute the object of the appeal referred to in the mentioned paragraph 7 of Article 89-A of the LGT, even if the basis of the illegality are defects of the inspection procedure that underlies the decision of fixing the taxable matter by indirect methods.

h. With respect to the question of lapse of the right of assessment, it is unequivocal that this is a defect of the assessment, independently of the moment to which its verification by such assessment is reported, whereby it can only be invoked with the issuance thereof.

i. Furthermore, even if this were not the case, it follows unequivocally from the allegations in Articles 56 and following of the arbitral Request that the Applicant imputes to the act a defect of lapse for a fact verified after the decision of fixing the taxable income by indirect methods, which alone would prevent the success of the thesis sustained in the learned response of the ATA, regarding the prior use of the appeal of that decision and res judicata.

j. Whereby, the alleged exceptions invoked by the ATA should be judged to be unfounded, and the arbitral proceedings should continue for the knowledge of the substantive issues.

1. Applicant and Respondent presented arguments in which, in substance, they maintained their positions.

2. The Tribunal is regularly constituted pursuant to the LRAT.

The parties have standing and capacity to sue, are legitimate and are legally represented.

The proceeding does not suffer from defects that would invalidate it.

1. It is necessary to resolve the following questions:

a) Whether the exception of material incompetence of the arbitral tribunal occurs.

b) Whether there is res judicata.

In the event of unfoundedness of these exceptions,

c) Whether the assessment acts impugned are illegal, on the ground of the defects pointed out by the Applicant.

d) In the event of annulment of the assessments, whether the request for condemnation in the amounts petitioned should proceed, and

e) Whether the Respondent should be condemned to pay the Applicant indemnity interest.

II – The Relevant Facts

1. Facts Proven

The following facts are considered proven:

9.1. The Applicant was subject to an inspection action carried out by the services of Investigation of Fraud and Special Actions of the General Directorate of Taxes (DSIFAE), for consultation, collection and cross-checking of information, relating to the years 2005 to 2007 in compliance with Dispatches no. D1 … and D1 … issued by the Director of DSIFAE.

9.2. This inspection was initiated on 9.07.2007 and had its end on 23.07.2008.

9.3. On 9.07.2007, the Applicant declared authorization for the General Directorate of Taxes – Directorate of Services for Investigation of Fraud and Special Actions, to consult or request from any credit institution or financial company, all bank documents, namely bank statements and respective supporting documents.

9.4. On 17.07.2007, the Respondent sent an official letter to the Bank of Portugal requesting that within 10 business days it send to the Directorate of Services for Investigation of Fraud and Special Actions the bank statements of the Applicant's accounts.

9.5. Such information was provided to the Respondent by the Banking Institutions.

9.6. On 25 June 2008, at 15 hours and 30 minutes, within the scope of that inspection, the Applicant was notified in the street …, in ..., by technicians of that DSIFAE, to appear at the premises of that Directorate of Services, located at Avenue …, no. …, …th floor, in ..., by 10 hours of the 30th of the same month to, under the principle of cooperation provided for in Article 59 of the General Tax Law, and Article 34 of the Complementary Regime of Tax Inspection Procedure, provide clarifications related to the following bank accounts:

• No. …/…, of Bank ....

• No. …/…, of Bank ....

• No. …, of Bank ....

9.7. According to the same notification, failure to appear on the designated day and time constituted a violation punishable under Article 117 of the General Regime of Tax Violations.

9.8. The Applicant appeared on the indicated day and time and provided the requested clarifications.

9.9. Ms. C… was also heard within the scope of that inspection due to the fact that she was co-holder of bank account No. …/…, of Bank ....

9.10. Following the information collected in this inspection procedure, on 15/05/2009 inquiry proceeding no. …/……. was registered in the Central Department of Criminal Investigation and Action, intended to investigate the practice of crimes in tax matters, which was referred to the Department of Criminal Investigation and Action on 02/04/2013 and was subject to an archiving dispatch on 24/04/2013.

9.11. On 25 July 2008, the Applicant was notified of the closure of the inspection procedure on 23 July.

9.12. By letter dated 21 April 2010, the Applicant was notified that, under Service Orders no. O1 …/…/…, of the Tax Inspection Services of the Finance Directorate of ..., in the very short term technicians of those services would proceed to her then residence with a view to the verification of IRS relating to the years 2005, 2006 and 2007 within the scope of action, qualified by the Respondent as external and partial, relating to IRS and VAT for the years 2005, 2006 and 2007.

9.13. The notification letter was sent to the Applicant on 21/04/2010 and the inspection acts took place in the period between 02/06/2010 and 06/09/2010;

9.14. Within the scope of the procedure, the Applicant provided, by letter of 5.05.2010, clarifications regarding the income obtained in the years under analysis.

9.15. Still within the scope of Service Orders no. O1 …/…/… the Applicant was notified on 22.07.2010, pursuant to Article 3 of Article 89º-A of the LGT, in order to provide clarifications on the truthfulness of the declared income, in light of the amounts deposited in the bank accounts of which she is holder in the years 2005 and 2006.

9.16. Following this notification the Applicant provided clarifications, having attached a declaration signed by D…, where it is stated that the Applicant sold various diamonds to house E…, between 1987 and 1988, for an approximate price of US$350,000.

9.17. On 28.10.2010 the Respondent was notified of the respective draft for exercise of the right of hearing.

9.18. The right of hearing was exercised by the Applicant, on 18.11.2010, with her positions being appreciated, but not accepted, by the Respondent.

9.19. On 25/11/2010 the Applicant was notified of the Final Inspection Report, endorsed by dispatch of 23/11/2010 of the Finance Director of ..., determining taxable income through indirect methods in the amount of €98,082.65 with classification in subparagraph f) of paragraph 1 of Article 87 and paragraph 5 of Article 89-A of the LGT, and paragraph 3 of Article 9 of CIRS.

9.20. Not accepting the decision that fixed for the Applicant taxable income pursuant to subparagraph f) of Article 87 and paragraph 5 of Article 89-A of the General Tax Law, the Applicant reacted against that decision by filing an appeal to the Tax Court of ..., which proceeded before that Court, under no. …/…….;

9.21. Meanwhile, the Applicant was notified by letter from the Criminal Tax Proceedings Division of the Finance Directorate of ... that she should appear on 13 October 2010 at the premises of that division to be heard as a defendant in an Inquiry proceeding, which the Applicant did, having then been constituted as a defendant.

9.22. In May 2012, the Applicant was notified of the decision delivered by the Tax Court of ..., in which, considering that there was no increment in the patrimony of the Applicant that would enable the Tax Authority to fix her taxable income by indirect assessment, that Court totally upheld the judicial appeal presented by the Applicant, annulling the decision fixing the taxable income.

9.23. Against that decision the Finance Director of ... would file judicial appeal to the Central Administrative Court South, which, considering that the Applicant had presented the appeal provided for in paragraph 7 of Article 89-A of the LGT outside the time limit provided for in Article 146-B of the CPPT, determined, by decision of 23 July 2012, the annulment of the decision of the Tax Court of ... and absolved the Tax Authority from the claim on the ground of untimeliness of the petition.

9.24. On 20 September 2012 the Applicant was notified of the IRS assessments that are the subject of this proceeding.

9.25. Not accepting those assessments, the Applicant presented a grace claim and, following this, hierarchical appeal to His Excellency, the Minister of Finance, which would be dismissed by dispatch of Her Excellency the Director of IRS Services dated 2 December 2014, notified to the applicant by registered mail sent on 17.12.2014 and received on 18.12.2014.

9.26. The Applicant paid on 18.06.2014, already within the scope of the enforcement proceeding instituted to collect such amounts, €43,998.90 as title of tax and compensatory interest, and still within the scope of enforcement proceeding instituted to collect the value of the assessments, €4,376.12 as title of default interest, €638.46 as title of court costs and €3.91, as title of expenses, with the Applicant having paid, in total, €49,017.39.

With interest for the decision of the cause, there are no unproven facts.

1. The Tribunal's conviction regarding the decision of the facts of the case was based on the critical analysis of the documents contained in the record, both those contained in the administrative proceeding and those submitted by the Applicant, which were not subject to impugnation by the parties, it being noted that there was no disagreement by the parties regarding the facts of the case, the disagreement being confined to the matter of law.

III – Applicable Law

ON THE MATTER OF EXCEPTION

Material Incompetence of the Tribunal

1. The Respondent argues that the Arbitral Tribunal cannot know claims relating to acts of determination of taxable matter and acts of determination of taxable income, both by indirect methods, including the decision of the review procedure, as provided for in subparagraph b) of Article 2 of Regulation no. 112-A/2011, of 22.03.

For its part, the Applicant argues that in the request for arbitral pronouncement the Applicant does not put into question the content of the decision of correction of taxable matter by indirect methods, which became consolidated in the legal order following the finality of the decision of the Central Administrative Court South of 23 July 2012, and that what the Applicant intends to see recognized, uniquely and exclusively, are formal defects inherent to the assessment act that subsume it and render it illegal, defects that could only now be invoked, both by reason of the scope of the special appeal process provided for in paragraph 7 of Article 89-A of the General Tax Law, whose sole object is the decision of assessment by resort to indirect methods, constituting in that sole measure a separable act, and in function of the principle of unified impugnation set forth in Article 54 of the Tax Procedure and Process Code.

Let us see.

Article 2, paragraph 1, of Decree-Law no. 10/2011 of 20 January, in its original wording, had the following wording:

"1 - The jurisdiction of arbitral tribunals comprises the appreciation of the following claims:

a) The declaration of illegality of acts of assessment of taxes, self-assessment, withholding at source and payment on account;

b) The declaration of illegality of acts of determination of taxable income, of acts of determination of taxable matter, and of acts of fixing of asset values;

c) The appreciation of any question, of fact or of law, relating to the draft decision of assessment, whenever the law does not ensure the faculty of deducing the claim referred to in the preceding subparagraph."

For its part, Article 4, paragraph 1 of the same Decree-law provides that "The binding of the tax authority to the jurisdiction of the tribunals constituted pursuant to the present law depends on a regulation of the members of Government responsible for the areas of finance and justice."

Such binding was materialized with Regulation no. 112-A/2011 of 22 March, whose Article 2 (with the heading "Object of the binding"), provides:

"The services and organisms referred to in the preceding article bind themselves to the jurisdiction of the arbitral tribunals that function in the CAAD that have as their object the appreciation of claims relating to taxes whose administration is their responsibility referred to in paragraph 1 of Article 2 of Decree-Law no. 10/2011, of 20 January, with exception of the following:

a) (….)

b) Claims relating to acts of determination of taxable matter and acts of determination of taxable income, both by indirect methods, including the decision of the review procedure;

c) (…)

d) (….) ".

Law no. 64-B/2011, of 30 December repealed subparagraph c) of paragraph 1 of Article 2, paragraph 1, of Decree-Law no. 10/2011 of 20 January and gave new wording to subparagraph b) of the same number, which now has the following wording:

"b) The declaration of illegality of acts of fixing of taxable income when such does not give rise to the assessment of any tax, of acts of determination of taxable matter and of acts of fixing of asset values."

As a preliminary matter, it should be noted that we understand that the matter of exception raised by the Respondent constitutes an unnamed dilatory exception and not material incompetence, since, naturally, the regulation did not repeal the norm of jurisdiction attributed to the arbitral tribunal by Decree-Law no. 10/2011 of 20 January. The norm of this Decree-Law that attributed jurisdiction continues in force. What occurs is the absence of binding of the Tax Authority with respect to the type of acts in question. In any case, in the event of success, the consequence is the same: the absolution of the arbitral instance.

Essential to the decision of the exception in question is to know whether the decision of assessment of taxable matter by the indirect method constitutes the object of the present proceeding.

It results clearly from the request for arbitral pronouncement that the Applicant does not put into question the decision of assessment of taxable matter by the indirect method. What the Applicant intends to see recognized is the illegality of the assessment on the ground of the repetition of the external inspection procedure with respect to the same taxpayer, tax and tax period, prohibited by Article 63, paragraph 4 (paragraph 3 in the wording in force at the time of the facts) of the General Tax Law, with no new facts in existence, and on the other hand, on the ground of lapse of the right of assessment.

To this extent, we are in the presence of assessment acts, with respect to which the Respondent is bound by Article 2 of Regulation no. 112-A/2011 of 22 March, with the exception provided for in subparagraph b) of the same article not occurring.

Accordingly, the exception in question is judged to be unfounded.

Res Judicata

1. The TA argues that the defects that the Applicant invokes are capable of affecting the legality of the decision of the Finance Director of ... which fixed the taxable matter concerning IRS for 2005 using indirect methods and that, not having the Applicant reacted in a timely manner, within the time limit expressly provided for that purpose, to the decision of fixing the taxable matter using indirect methods, as per the decision delivered by the Central Administrative Court South on 23/07/2012, which has already become final, the same became consolidated in the legal order, and the legality of the assessment act cannot now be attacked on the basis of those defects.

For its part, the Applicant argues that in the request for arbitral pronouncement the Applicant does not put into question the content of the decision of correction of taxable matter by indirect methods, which became consolidated in the legal order following the finality of the decision of the Central Administrative Court South of 23 July 2012, and that what the Applicant intends to see recognized, uniquely and exclusively, are formal defects inherent to the assessment act.

Article 580 of the Civil Procedure Code provides:

"1 - The exceptions of lis pendens and res judicata presuppose the repetition of a cause; if the cause is repeated while the previous one is still in course, there is lis pendens; if the repetition occurs after the first cause has been decided by a judgment that no longer admits ordinary appeal, there is res judicata.

2 - Both the exception of lis pendens and res judicata are intended to prevent the tribunal from being placed in the alternative of contradicting or reproducing a prior decision.

3 – (…)"

For its part, Article 581 of the same statute has the following wording:

"1 - A cause is repeated when an action identical to another is proposed as to the subjects, the claim and the cause of action.

2 - There is identity of subjects when the parties are the same from the point of view of their legal quality.

3 - There is identity of claim when in each and every cause the intention is to obtain the same legal effect.

4 - There is identity of cause of action when the claim made in the two actions proceeds from the same legal fact. In real actions the cause of action is the legal fact from which the real right is derived; in constitutive and annulment actions, it is the concrete fact or the specific nullity invoked to obtain the intended effect."

As already referred, what the Applicant invokes in the present proceeding, in addition to the lapse of the right of assessment, is the illegality of the assessment on the ground of the improper repetition of the external inspection procedure prohibited by Article 63, paragraph 4 (paragraph 3 at the time of the facts) of the General Tax Law.

On this possibility can be read in the Decision of the Constitutional Court No. 554/2009, of 27 October 2009, delivered in incidental appeal concerning a decision of the Supreme Administrative Court of 24.09.2008, proceeding 0342/08, the following:

"The appeal is, thus, limited to the question of the unconstitutionality of the rule of Article 87-A, paragraph 7, of the LGT, when interpreted in the sense of providing therein the "sole procedural means available to the taxpayer to react against the decision of assessment and, by anticipation, against the assessment that is based on that assessment."

To this regard, it is written in the decision of the Supreme Administrative Court, hereby appealed, the following (cf. fls. 108 of the record):

"The impugners, now appellants, conclude that there is no "any impediment or obstacle to judicial impugnation against IRS assessment made in the sequence of indirect assessment pursuant to the indicated Article 89-A. And they conclude correctly.

In fact, the assessment may be impugned on the ground of "any illegality". It happens, however, that the question (preliminary) of the value of taxable matter has autonomy in the present situation. In fact, and as follows from the legal regime and the doctrine referred to above, the decision of assessment of taxable matter, because it is a separable act, becomes a res judicata or case resolved, if not attacked by means of "appeal to the tax court," as was not the case in this case."

And, further on, the following conclusion is reached (cf. fls. 108 v. of the record):

"The decision of assessment constitutes a separable act of the administrative procedure, whereby a res judicata or case resolved is formed in the absence of judicial appeal of that decision, which, thus, is consolidated in the legal order, and cannot be called into question in the judicial impugnation of the respective assessment."

It is verified that the interpretation adopted in the decision appealed does not fully correspond to that indicated by the appellants. In fact, the Supreme Administrative Court did not consider that the appeal provided for in Article 89-A, paragraph 6, of the LGT, was the sole procedural means available to the taxpayer to react, by anticipation, against the assessment that is based on that assessment.

On the contrary, the appealed decision emphasizes the possibility, offered by the legal order, of the taxpayer judicially impugning the final act of the assessment, which had as its premise an indirect assessment decision of taxable matter. And it understands that what can no longer be questioned, within the scope of judicial impugnation of the assessment, is the decision of assessment, as a separable act, susceptible of immediate and autonomous judicial impugnation, pursuant to the provision in question."

In the same sense, the Supreme Administrative Court decided in the appeal delivered in proceeding 0188/09, of 09-09-2009, that:

"(…) the decision of assessment of taxable matter by the indirect method of Article 89-A of the General Tax Law constitutes an act which, although preparatory of the assessment (in the strict sense), assumes the nature of a prejudicial act or separable act since, first of all, it defines a legal situation, being inserted in inter-subjective relations and irremediably conditioning the final decision.

As such, it is such decision of assessment of taxable matter, first and foremost, susceptible of "appeal to the tax court," becoming established on the question, and in the absence of that "appeal," a res judicata or case resolved, with effects similar to judicial res judicata, consolidating the decision in the legal order, albeit the illegalities from which it might suffer, determinative of its annullability (merely voidable acts) – as, in fact, is the understanding of the settled and consistent jurisprudence of the Supreme Administrative Court.

Now, in the case sub judice, the judicial impugnation is deduced from the "additional IRS assessment no. 2006 …, issued by the Finance Service of Santo Tirso, relating to the year 2004, in the amount of 31,648.36 euros".

The impugners, now appellants, conclude that there is no "any impediment or obstacle to judicial impugnation against IRS assessment made in the sequence of indirect assessment pursuant to the indicated Article 89-A."

And they conclude correctly.

In fact, the assessment may be impugned on the ground of "any illegality". It happens, however, that the question (preliminary) of the value of taxable matter has autonomy in the present situation."

We can thus conclude, following the jurisprudence cited, that the decision of assessment of taxable matter provided for in paragraphs 5 to 11 of Article 89-A of the General Tax Law does not prevent the impugnation of the assessment that had as its basis the determination of taxable matter by the indirect method provided therein, provided that such impugnation is not based on the illegality of the decision of assessment of taxable matter. What can no longer be questioned within the scope of impugnation of the assessment is the decision of assessment.

In the case in question, one of the illegalities pointed out, the alleged lapse of the right of assessment, would be a defect inherent to the final assessment act (due to the fact that, in the Applicant's thesis, the assessment was made at a date later than that of the occurrence of the lapse), therefore, exterior and subsequent to the decision of assessment of taxable matter.

The other illegality pointed out, consisting of the alleged occurrence of two external inspections on the same taxpayer, tax and tax period, in violation of Article 63, paragraph 3 of the General Tax Law, in the wording at the time of the facts, the same is also exterior to the decision of assessment of taxable matter, since it results from the combination of the existence of two external inspections, prohibited in that norm, whose illegality is subject to the principle of unified impugnation provided for in Article 54 of the Tax Procedure and Process Code.

Thus being, and because the decision of assessment does not constitute the ground of the request for arbitral pronouncement, there does not occur the existence of res judicata, since we are in the presence of different causes of action, since, as provided for in Article 581, paragraph 4, of the Civil Procedure Code, "(…) the cause of action (…) in constitutive and annulment actions is the concrete fact or the specific nullity invoked to obtain the intended effect."

The exception of res judicata raised by the Respondent is thus judged to be unfounded.

ON THE MERITS OF THE CASE

Prohibition of Repetition of External Inspection Procedure

1. The Applicant argues that she was subject to two external inspections concerning Personal Income Tax, relating to the same tax period, with the second procedure not being based on any "new facts," but rather on the same exact facts regarding which the Applicant had already been heard within the scope of the first procedure carried out by DSIFAE.

For its part, the Respondent argues that there does not occur any violation of the principle of non-repetition of the tax inspection procedure, provided for in paragraphs 2, 3 and 4 of Article 36 of RCPITA, and paragraph 3 of Article 63 of the LGT, since the inspection action carried out by DSIFAE, under the dispatches DI2007 … and DI2007 …, had as its objective the mere consultation, collection and cross-checking of information, pursuant to subparagraph a) of paragraph 4 of Article 46 of RCPIT and was intended for the prior preparation of the inspection procedure to be carried out at a later time.

There is thus a need to inquire whether or not two external inspections concerning Personal Income Tax relating to the same tax period occurred, not based on new facts, since, as provided for in paragraph 3 of Article 63 of the General Tax Law, at the time of the facts (now paragraph 4), "The inspection procedure and the duties of cooperation are adequate and proportionate to the objectives to be pursued, and there may be more than one external inspection procedure concerning the same taxpayer or tax obligor, tax and tax period only by decision, substantiated on the basis of new facts, of the highest director of the service, except if the inspection aims only at confirming the assumptions of rights that the taxpayer invokes before the tax authority and without prejudice to the determination of the tax situation of the taxpayer by means of inspection or inspections directed to third parties with whom the taxpayer maintains economic relations."

The following is the wording of Article 13 of the Complementary Regime of Tax Inspection Procedure:

"With respect to the place of realization, the procedure may be classified as:

a) Internal, when the inspection acts are effected exclusively in the services of the tax authority through formal analysis and coherence of the documents;

b) External, when the inspection acts are effected, totally or partially, in the premises or dependencies of the taxpayers or other tax obligors, of third parties with whom they maintain economic relations or in any other place that the authority has access to"

Regarding the distinction between internal and external procedure, Joaquim Freitas da Rocha and João Damião Caldeira write:

"Note that for the procedure to be classified as internal, the procedure must materialize in acts, all of them, performed exclusively in its services, premises or dependencies, namely through formal and coherence analysis of the documents. Otherwise (that is, if there are acts performed outside, even if diminutive), we are before an external procedure).

The internal procedure is a kind of cadastral inspection, carried out within the inspection services themselves, using elements declared by the taxpayers, and encompasses activities of mere verification in which the Administration limits itself to checking compliance by the taxpayers of their declarative duties.

In these cases, the tax Authority limits itself particularly to confronting, through cross-checking of information available in its databases, whether the taxpayer complied or not with its duties and whether the elements provided by declarations delivered by other tax obligors with whom the taxpayer maintained or maintains relations. It is not, therefore, an inspection activity properly speaking, in the strict sense, it is an activity of formal verification to check the accuracy of what was formally declared by the taxpayer. Within the framework of that internal procedure, the tax inspection may request information and clarifications from taxpayers, and corrections may be made as a result of what is determined"

1. In the jurisprudence can be read in the decision of the Central Administrative Court-South, of 20.03.2012, proceeding 04371/10:

"In light of the content of the report and the grounds that served as the basis for the corrections made, it is not possible to say that the initial procedure aimed only at information collection. It did not; in fact, it was much more than that, since it was on this information that the entire inspection action was based.

What results from the record is precisely a sequence of inspection initiated with the procedure of 10/12/2007 and 11/12/2007, which manifestly was oriented toward the identification of possible violations and analysis of the bookkeeping of the impugner in order that corrections to taxable matter could result. In this manner, one must conclude that:

The procedure of 10/12/2007 and 11/12/2007, was not merely information collection.

(…)

That inspection had external character. (…)

In fact, pursuant to the provision of Article 13 of the referred RCIT, with respect to the place of realization, the procedure may be classified as:

a) Internal, when the inspection acts are effected exclusively in the services of the tax authority through formal analysis and coherence of the documents;

b) External, when the inspection acts are effected, totally or partially, in the premises or dependencies of the taxpayers or other obligors, of third parties with whom they maintain economic relations or in any other place that the authority has access to.

Now, in light of the content of the report and the grounds that served as the basis for the corrections made, it is not possible to say that the procedure of 10/12/2007 and 11/12/2007, aimed only at information collection, rather one can affirm that it was much more than that, since it was on this information that the entire inspection action was based.

In fact, the record shows that there was a sequence of inspection initiated with the procedure of 10/12/2007 and 11/12/2007, which was oriented toward the identification of possible violations and analysis of the bookkeeping of the impugner in order that corrections to taxable matter could result. It is therefore necessary to conclude that the procedure of 10/12/2007 and 11/12/2007, was not merely information collection, but rather initiated the inspection conducted on the taxpayer, which had external character."

In the same sense is the decision of that same Court of 01-10-2014, delivered in proceeding 04817/11:

"We have already said: the internal inspection procedure occurs when the inspection acts are effected exclusively in the services of the tax authority through formal analysis and coherence of the documents.

However, and in the case, it cannot be said that the inspection acts were effected exclusively in the services of the tax authority through formal and coherence analysis of the documents, since the elements that decisively motivated the correction were obtained from third parties, by initiative of the TA and, as well, because obviously the correction made did not result from a conformity analysis of documents that the TA had in its power (the information/documents in question only became available to the TA because the TA collected it from third parties).

In truth, only because this investigatory activity was not integrated into the inspection (in its temporal period) could it be termed as a procedure of consultation, collection and cross-checking, allowing, to that extent, the qualification of the subsequent inspection as "internal inspection."

Now, we have already said: the qualification of the procedure as internal or external inspection does not depend on the free qualification that the TA attributes to it, rather following legal criteria that confirm or not the designation chosen. And, once more, drawing on the author and work cited, at page 81, "(…) for the procedure to be classified as internal, the procedure must materialize in acts, all of them, performed exclusively in its services, premises or dependencies, namely through formal and coherence analysis of the documents. Otherwise (that is, if there are acts performed outside, even if diminutive), we are before an external procedure)."

Now, concluding, as concluded, that the activity undertaken by the TA, specifically in March and November of 2007, does not constitute merely information collection activity, rather translating into the beginning of an external inspection action, of obvious investigatory character (…)".

Joaquim Freitas da Rocha and João Damião Caldeira further note, in the work cited:

"On the question of classification of the inspection procedure as internal or external, it is important to highlight what we call "appearance of procedures." This "appearance of procedures" is manifested in situations where, although the procedures are formally classified by the Tax Administration in a certain way, in reality and materially, in function of the acts performed, they do not correspond to the classification attributed to them. This nonconformity can and should have effects on the final outcome of the procedure, and the effects should be valued against the Tax Administration itself. Since the latter is bound by the principle of legality."

In the case in question, even though the first inspection was not formally qualified by the Respondent as external, the truth is that, materially, the same cannot fail to be qualified as such.

In fact, the inspection in question did not consist of inspection acts performed exclusively in the services of the tax authority through formal analysis and coherence of documents. Quite the contrary, the inspection activity was oriented in the direction of lifting the banking secrecy of the Applicant, having obtained authorization from her on the very date of the beginning of the procedure, and collected the banking information in question. It also collected the deposition of the Applicant regarding the information obtained, after notification made for such purpose in a location other than the premises of the services that conducted the inspection.

It also collected the deposition of the co-holder of the bank account.

For Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, who write regarding paragraph 4 of Article 63 of the General Tax Law (which corresponds to paragraph 3 in force at the time of the facts), "With this restriction of inspection powers, the aim is to ensure that the same taxpayer or tax obligor is not burdened more than once with the inconveniences that external inspection actions are capable of causing."

Not only is there no doubt, in light of the acts performed, that the first inspection had an external character, but the same were, moreover, of high intrusive intensity, and it is important to note, in addition to the other acts mentioned, within the scope thereof, authorization was obtained for consultation of the Applicant's banking information, following which the same was effectively collected from the banking institutions.

In light of the acts performed in the inspection procedure, it is therefore not sustainable, to be in the presence of an internal inspection, but in light of the factual matter proven, unquestionably, before an external inspection.

The argumentation of the Respondent thus does not stand that the inspection action carried out by DSIFAE, under the dispatches DI2007 … and DI2007 …, was intended as prior preparation of the inspection procedure to be carried out at a later time, and it is certain that pursuant to Article 11 of the Complementary Regime of Tax Inspection Procedure, the inspection procedure has, in reality, "a merely preparatory or ancillary character of the tax acts or matters in tax," with no preparatory character being provided for with respect to other inspection procedures, which would, moreover, always be contrary to the constitutional principle of efficiency of the administration resulting from Article 267, paragraph 5, of the Constitution of the Portuguese Republic.

Now, having subsequently been carried out for the Applicant a new inspection, expressly qualified and processed by the Respondent as external, relating to the same tax and tax period, where she was confronted with the same facts and banking information, with the Applicant providing clarifications on two occasions and exercising the right of hearing prior to the final report, the same cannot fail to be qualified as external, such as qualified by the Respondent, with the repetition of external inspection procedure, not based on new facts, occurring in violation of Article 63, paragraph 3 (now paragraph 4) of the General Tax Law.

The illegality in question constitutes a defect of violation of law generating annullability, which results in the annulment of the assessments sub judice, leaving thus prejudiced the appreciation of the lapse of the right of assessment and the illegality of assessment of compensatory interest invoked by the Applicant, on the ground of absence of fault on her part in the delay in assessment.

1. The Applicant further requested the condemnation of the Respondent to restore the amounts paid, in the value of €49,017.39, increased by indemnity interest.

Of this value, €43,998.90 corresponds to the assessments sub judice, €4,376.12 to default interest, €638.46 to court costs in the enforcement proceeding and €3.91 to expenses, also of that proceeding.

In accordance with the provision in subparagraph b) of Article 24 of the LRAT, the arbitral decision on the merits of the claim of which no appeal or impugnation may be filed binds the tax authority from the end of the time limit provided for appeal or impugnation, with the latter obliged, in the exact terms of the success of the arbitral decision in favor of the taxpayer and until the end of the time limit provided for the voluntary execution of judgments of tax judicial courts, to "restore the situation that would exist if the tax act that is the object of the arbitral decision had not been performed, adopting the acts and operations necessary for that purpose," which is in harmony with what is provided for in Article 100 of the LGT [applicable by force of the provision in subparagraph a) of paragraph 1 of Article 29 of the LRAT], which establishes that "the Tax Authority is obliged, in case of total or partial success of a grace claim, judicial impugnation or appeal in favor of the taxpayer, to the immediate and full restoration of the legality of the act or situation that is the object of the dispute, including the payment of indemnity interest, if applicable, from the end of the time limit of execution of the decision."

Although Article 2, paragraph 1, subparagraphs a) and b), of the LRAT uses the expression "declaration of illegality" to define the jurisdiction of the arbitral tribunals that function in the CAAD, making no reference to condemning decisions, it should be understood that the powers attributed to the judicial courts in the process of judicial impugnation are included within its jurisdiction, being this the interpretation that is in tune with the sense of the legislative authorization on which the Government based itself to approve the LRAT, in which it proclaims, as the first directive, that "the tax arbitration process should constitute an alternative procedural means to judicial impugnation and to action for the recognition of a right or legitimate interest in tax matters."

The process of judicial impugnation, despite being essentially an annulment process of tax acts, admits the condemnation of the Tax Authority in the payment of indemnity interest, as is withdrawn from Article 43, paragraph 1, of the LGT, in which it is established that "indemnity interest is due when it is determined, in a grace claim or judicial impugnation, that there was error attributable to the services from which results payment of the tax debt in an amount exceeding that legally due," and Article 61, paragraph 4 of the CPPT (in the wording given by Law no. 55-A/2010, of 31 December, to which corresponds paragraph 2 in the original wording), where it is provided that "if the decision that recognized the right to indemnity interest is judicial, the payment time limit is counted from the beginning of the time limit for its voluntary execution."

Thus, paragraph 5 of Article 24 of the LRAT providing that "the payment of interest, regardless of its nature, is due, pursuant to the terms provided for in the general tax law and in the Tax Procedure and Process Code" should be understood as permitting the recognition of the right to indemnity interest in the arbitral process, should the respective requirements be met.

In the case in question, it is manifest that, following the declaration of illegality and consequent annulment of the assessment acts, there is due a reimbursement of the value of the assessments paid, in the amount of €43,998.90, by force of the referred Articles 24, paragraph 1, subparagraph b), of the LRAT and 100 of the LGT, since such is essential to "restore the situation that would exist if the tax act that is the object of the arbitral decision had not been performed."

1. The reasons that have just been indicated for admitting the jurisdiction of the Arbitral Tribunals for the rendering of condemning decisions with respect to the payment of indemnity interest and the reimbursement of the amounts paid corresponding to the assessments (jurisdiction which, apparently would not follow from Article 2, paragraph 1 of the LRAT) do not, however, have the scope of attributing to the tribunal powers to condemn the Respondent to the payment of other amounts that do not result from the declaration of illegality of the assessments.

The payment of default interest, court costs and expenses with the enforcement proceeding by the Applicant does not result directly from the practice of the illegal assessment acts, but from the absence of voluntary payment of the tax payments, it being known that in tax procedure and process the principle "solve and repeat" applies, according to which it is required of the taxpayer, in the words of Saldanha Sanches, "the prior payment of the tax, with subsequent return of the undue amount if the taxpayer comes to win the dispute with the tax authority, acquiring, in this case, the right to receive indemnity interest."

On the other hand, as is well known, the taxpayer may avoid the institution of enforcement, by providing a guarantee pursuant to Article 169 of the Tax Procedure and Process Code (with the consequent right to indemnification should the same come to be considered undue pursuant to Article 53 of the General Tax Law) or obtaining its dispensation should the taxpayer meet the requirements therefor, pursuant to Articles 52, paragraph 4 of the General Tax Law and 170 of the CPPT.

Accordingly, even if the arbitral tribunal had condemning jurisdiction for the claim in question, the request could not fail to be unfounded, since the amounts referred to do not derive from the acts declared illegal, but rather from the fact that the Applicant did not request suspension of execution, nor did she make payment within the legal time limit.

In these terms, the Applicant's claim is unfounded with respect to the request for condemnation of the Tax Authority to pay the value of €4,376.12 of default interest, €638.46 of court costs of the enforcement proceeding and €3.91 of expenses of the same proceeding, paid by the Applicant.

1. It remains to appreciate the Applicant's claim with respect to indemnity interest on the value of the assessments.

Pursuant to Article 43, paragraph 1, of the General Tax Law, "Indemnity interest is due when it is determined, in a grace claim or judicial impugnation, that there was error attributable to the services from which results payment of the tax debt in an amount exceeding that legally due."

In the situation in question, the illegality that determined the annulment of the assessments in question was the violation of the provision in Article 63, paragraph 3, of the General Tax Law, in the wording at the time of the facts (now paragraph 4), and not the existence of error in the factual or legal assumptions of the tax acts in question.

Essential to the appreciation of the Applicant's claim is, therefore, the determination of the normative meaning of the expression "error attributable to the services from which results payment of the tax debt in an amount exceeding that legally due."

In the decision of the Supreme Administrative Court of 30.5.2012, delivered in proceeding 0410/12, can be read the following: "(…), the declaration of lapse does not imply the existence of an error – a defect regarding the factual or legal assumptions – that allows the establishment in favor of the taxpayer of the right to indemnity interest pursuant to paragraph 1 of Article 43 of the LGT.

Let us see:

It is true that in the case sub judice we are not before a simple situation of lack of (valid) notification of the assessment, a case in which it would be unequivocal that such a defect, of a procedural nature and exterior to the assessment procedure, in no way would contend with the substantive tax legal relationship and, therefore, would be incapable of conferring upon the taxpayer the right to indemnity interest under the provision of paragraph 1 of Article 43 of the LGT. In fact, if the question were merely the omission of a legal formality in communication of the act to the Taxpayer, the defect could always be cured by the repetition of the notification, with observance of the legally required form, whereby it would never be justified to grant the right to indemnity interest.

In the case, however, the situation is not one of simple lack of notification of the assessment, but one of lapse of the right of assessment due to lack of notification within the legal time limit for the exercise of that right (cf. Article 45, paragraph 1, of the LGT); that is, of the fact that the notification was not validly effected within the time limit the law sets for such purpose resulted as a consequence the loss of the right to assess the tax.

However, if it is true that the lack of notification within the lapse time limit extinguished the right of assessment of the tax (and in that respect the judgment became final), the declaration of that lapse does not mean any judgment about the validity of the underlying substantive tax relationship.

As is known, lapse, juridically, is mere legal fact related to time and which determines the impossibility of the exercise of a right in a concrete case (Prescription and lapse have in common the fact of being legal figures related to the acquisition or loss of subjective situations by the mere passage of time: the first is associated with rights or consolidated legal situations, being its field of application the subjective rights in itself; the second concerns legal situations in formation and potestative rights, whose exercise is subject to short periods.

In synthetic terms, we can say that prescription determines the extinction of a right and lapse the impossibility of exercising it in a concrete case (Cf. Lapse in Administrative Law: Brief Considerations, Studies in Homage to Counselor José Manuel Cardoso da Costa, 2005, Coimbra Editor).). This means that the judicial decision, in the terms in which it was delivered, limited itself to drawing the legal effects of the passage of time without the notification having been effected, which does not imply any judgment about the validity of the underlying substantive tax relationship and, consequently, does not allow the conclusion of the existence of an error regarding the factual or legal assumptions.

Now, as results from what we have already said, the right to indemnity interest provided for in Article 43 of the LGT requires that there be error attributable to the services from which resulted (in light of a causal nexus) the payment of undue tax. It is the existence of that error that we consider cannot be given as verified in light of the declaration of lapse of the right of assessment.

(…).

This does not mean that the Taxpayer, if they consider they are aggrieved in their patrimonial rights, cannot judicially demand the reparation to which they believe they are entitled, which is assured to them not only by the Constitution of the Republic (cf. Article 22), but by ordinary law (Law no. 67/2007, of 31 December, diploma in whose Article 9 any illegality is equated with unlawfulness). However, to obtain such reparation the Taxpayer will have to demonstrate, in an appropriate proceeding, the existence of the right to that indemnification, in light of the general rules of tort liability, as any other person who is aggrieved in their rights by acts of another, there being no constitutional or legal rule that requires that, in all cases of annulment of administrative acts, the taxpayer is automatically entitled to indemnity interest…"

The jurisprudence of the courts shows that indemnity interest within the meaning of Article 43 of the LGT is restricted to situations in which there is error in the substantive assumptions of the assessment act.

In the present case, the illegality that resulted in the annulment of the assessments consists of the violation of the procedural prohibition of repetition of inspection, and not of error in the substantive assumptions.

Accordingly, the Applicant's request for indemnity interest is unfounded.

IV – Decision

For the reasons set out above, the Arbitral Tribunal decides:

I. To judge as unfounded the exception of material incompetence of the arbitral tribunal raised by the Respondent.

II. To judge as unfounded the exception of res judicata raised by the Respondent.

III. To judge as well-founded the claim of the Applicant for annulment of the assessment acts, as they were executed in violation of Article 63, paragraph 3, of the General Tax Law, due to the improper repetition of the external inspection procedure relating to the same taxpayer, tax and tax period, without the existence of new facts.

IV. To annul the following acts:

a) IRS assessment no. 2012 …, concerning the year 2005

b) Compensatory interest assessments nos. 2012 … and 2012 …

c) Declaration of account settlement number 2012 …

V. To order the Tax and Customs Authority to restore to the Applicant the amount of €43,998.90, corresponding to the tax and compensatory interest paid in consequence of the annulled assessments, in the terms provided for in Articles 24, paragraph 1, subparagraph b), of the LRAT and 100 of the General Tax Law.

VI. To judge as unfounded the request for condemnation of the Respondent to pay the Applicant the amounts of €4,376.12 of default interest, €638.46 of court costs and €3.91 of expenses paid by the Applicant in the enforcement proceeding.

VII. To judge as unfounded the request of the Applicant for indemnity interest on the value of the assessments.

Thus decided and determined,

[Signature]

Arbitrator

On [Date]