Process: 199/2015-T

Date: November 18, 2015

Tax Type: IRS

Source: Original CAAD Decision

Summary

This arbitral decision (Process 199/2015-T) addresses the legality of a 2006 IRS assessment totaling €66,319.54. The taxpayer challenged the assessment on three grounds: procedural violations during the tax inspection, expiry of the assessment right under Article 45(1) of the General Tax Law (LGT), and illegality of compensatory interest charges. The case involves a complex procedural timeline: an initial inspection conducted in 2007-2008 was formally closed on July 25, 2008. Subsequently, a criminal investigation was opened in May 2009, leading to a second inspection order in April 2010. The inspection procedure ran from June to September 2010, concluding with a final report in November 2010 that determined taxable income of €155,049.72 using indirect assessment methods under Articles 87(1)(f) and 89-A(5) of the LGT. The taxpayer initially succeeded in annulling this assessment at the Tax Court of Lisbon in May 2012, but this decision was later revoked by the Southern Administrative Court on procedural grounds in July 2012, declaring the appeal out of time. The core legal issue centers on whether the inspection initiated in 2010 violated the statutory assessment deadline. Under Article 45 of the LGT, the Tax Authority generally has four years to issue assessments. Article 63(1) requires inspections to commence before this deadline expires. The taxpayer argued that since the first inspection closed in 2008 without resulting in an assessment, the subsequent 2010 inspection violated the time limits, rendering the 2012 assessment illegal. The case illustrates critical principles regarding inspection procedure formalities under the RCPIT (Articles 36, 63), the suspension and extension of assessment deadlines, and the dependency of compensatory interest on valid underlying assessments.

Full Decision

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (President Arbitrator), Jorge Bacelar Gouveia and Maria Forte Vaz, appointed by the Deontological Council of the Administrative Arbitration Centre to form an Arbitral Tribunal:

I – REPORT

On 18 March 2015, A…, taxpayer no. …, with tax domicile at Av. …, no. …, …, in Lisbon, filed a request for constitution of an arbitral tribunal, under the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime of Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter abbreviated as LRAT), seeking the declaration of illegality of the tax acts of assessment of PIT and Compensatory Interest relating to the year 2006, embodied in tax assessment no. 2012 …, dated 10/09/2012, and in compensatory interest assessment no. 2012 …, resulting in a total amount due of € 66,319.54.

To substantiate her request, the Claimant alleges, in summary, the occurrence of:

i. Defect of violation of form through non-compliance with the rules of inspection procedure provided for in articles 36, nos. 2, 3 and 4 of the RCPIT, article 63, no. 3 of the LGT, article 55 of the LGT and article 266 of the CRP;

ii. Lapse of the right to assessment through expiry of the period provided for in no. 1 of article 45 of the LGT, and commencement of the inspection procedure after the end of that period, in violation of no. 1 of article 63 of the LGT;

iii. Illegality of the assessment of compensatory interest.

On 20-03-2015, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.

The Claimant did not proceed to appoint an arbitrator, so, under the terms of article 6, no. 2, paragraph a) and article 11, no. 1, paragraph a) of the LRAT, the President of the Deontological Council of the CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated their acceptance of the assignment within the applicable timeframe.

On 13-05-2015, the parties were notified of these appointments and did not express willingness to refuse any of them.

In accordance with the provisions of article 11, no. 1, paragraph c) of the LRAT, the collective arbitral tribunal was constituted on 28-05-2015.

On 02-07-2015, the Respondent, duly notified to this effect, presented her reply, defending herself by exception and by impugn.

After attachment of documentation determined ex officio, given that there was no need for production of additional evidence, beyond the documentary evidence already incorporated into the record, that there were no matters of exception on which the parties needed to pronounce themselves, and that the general procedural principles of procedural economy and prohibition of useless acts apply in the arbitral process under the terms of articles 16, paragraphs c) and e) of the LRAT, the holding of the meeting referred to in article 18 of the LRAT was dispensed with.

Having been granted a period for presentation of written submissions, these were presented by the parties, pronouncing themselves on the evidence produced and reiterating and developing their respective legal positions.

A deadline of 30 days was set for the pronouncement of the final decision, after the presentation of submissions by the Tax Authority.

Having been unable to meet such deadline, it was extended by a further 30 days.

The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with articles 2, no. 1, paragraph a), 5 and 6, no. 1, of the LRAT.

The parties have legal personality and capacity, are legitimate and are legally represented, in accordance with articles 4 and 10 of the LRAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

The proceedings do not suffer from nullities.

Thus, there is no obstacle to the consideration of the case.

Everything considered, it is necessary to render

II. DECISION

A. FACTUAL MATTER

A.1. Facts Established as Proved

  1. By determination of orders no. DI2007… and no. DI2007…, of the Director of the Directorate of Services for Investigation of Fraud and Special Actions (DSIFAE), an inspection took place for consultation, collection and cross-referencing of elements through access to the Claimant's banking information.

  2. In the course of that inspection, the Claimant was visited by technicians of the DSIFAE on 25 June 2008, having been notified to appear at the facilities of that Directorate of Services on 30/06/2008, in order, under the principle of collaboration provided for in article 59 of the General Tax Law, and no. 4 of article 34 of the Supplementary Regime of Tax Inspection Procedure, to provide clarifications related to the said bank account.

  3. The Claimant provided the requested clarifications and authorized the services to lift banking secrecy.

  4. On 25 July 2008, the Claimant was notified of the closure of the inspection procedure as of 23 July.

  5. The decision to close the procedure was taken after requesting the bank account statements requested from the Bank of Portugal.

  6. On 15/05/2009 the criminal investigation process no. .../09....TELSB was registered in the DCIAP, intended to ascertain the commission of crimes in tax matters, which was sent to the DIAP on 02/04/2013 and subject to a filing order on 24/04/2013.

  7. In the course of that investigation process, service order OI2010…, of 14/04/2010, was opened by the Finance Directorate of Lisbon, for the conduct of external inspection action of partial scope, in the field of PIT and VAT for 2006.

  8. The notice letter was sent on 21/04/2010, and the inspection acts took place in the period between 02/06/2010 and 06/09/2010.

  9. On 13/10/2010 the Claimant was constituted as a defendant in the scope of the aforementioned investigation process, where the possible commission of the crime of tax fraud, provided for and punishable under no. 1 of article 103 of the RGIT, was being investigated, due to having been imputed the concealment of income in income tax returns (mod. 3) for 2005 to 2006.

  10. On 29/11/2010 the inspection action was concluded with notification to the Claimant of the Final Report, sanctioned by order of 23/11/2010 of the Director of Finance of Lisbon, determining taxable income using indirect methods in the amount of €155,049.72, falling within paragraph f) of no. 1 of article 87 and no. 5 of article 89-A of the LGT, and no. 3 of article 9 of the CIRS.

  11. The final report of this inspection action contains, among other things, the following:

"In compliance with Orders no. …2007… and no. …2007…, issued by the Director of the DSIFAE (Directorate of Services for Investigation of Fraud and Special Actions), those Services proceeded with an external inspection action of consultation, collection and cross-referencing of elements, relating to the years 2005 to 2007, with the tax subject A…."

  1. The Claimant reacted against that decision by filing an appeal to the Tax Court of Lisbon, case no. …/10….BELRS, which was heard by the 4th Unit of that Court.

  2. In May 2012, the Claimant was notified of the judgment rendered by the Tax Court of Lisbon, in which, considering that there was no increase in the assets of the aforementioned that would enable the Tax Authority to set her taxable income by indirect assessment, that Court deemed the judicial appeal presented by the Claimant to be fully merited, annulling the decision fixing the taxable income.

  3. The judgment rendered at first instance was revoked, on appeal filed by the Tax Authority to the Administrative Court of Southern Region (TCA Sul), which, by judgment of 23/07/2012, which became final, deemed the appeal petition to be out of time, declaring the right to appeal against that decision of fixing the assessable matter using indirect methods to be extinguished.

  4. On 10/09/2012 the PIT assessment for 2005 no. 2012 …, now in dispute, was issued.

  5. On 16/11/2012 a request for administrative review was filed, which was dismissed by order of 22/06/2013.

  6. Subsequently, a hierarchical appeal was filed, which maintained the previous decision on the request for administrative review.

  7. The investigation no. .../09....TELSB was filed by order dated 24-04-2013.

  8. The Claimant was notified of that decision dismissing the aforementioned appeal by Office of the Finance Directorate received on 18 December 2014.

  9. In the scope of the Tax Enforcement Proceeding no. …2012…, instituted for compulsory collection of those amounts, the Claimant proceeded to pay the totality of the debt owed.

A.2. Facts Established as Not Proved
  1. That the service order OI 2010 …, of 14/04/2010, of the Finance Directorate of Lisbon, for the conduct of external inspection action of partial scope, in the field of PIT and VAT for 2006, was opened for instruction of the investigation process no. .../09....TELSB.
A.3. Substantiation of the Factual Matter Proved and Not Proved

Regarding the factual matter, the Tribunal does not have to pronounce on everything that was alleged by the parties, but rather it falls to it the duty to select the facts that matter for the decision and to discriminate the proved matter from the not proved (cfr. art. 123, no. 2, of the CPPT and article 607, no. 3 of the CPC, applicable by virtue of article 29, no. 1, paragraphs a) and e), of the LRAT).

In this way, the facts relevant for the judgment of the case are selected and defined according to their legal relevance, which is established in view of the various plausible solutions to the legal question(s) (cfr. former article 511, no. 1, of the CPC, corresponding to current article 596, applicable by virtue of article 29, no. 1, paragraph e), of the LRAT).

Thus, taking into account the positions assumed by the parties, in light of article 110/7 of the CPPT, the documentary evidence and the procedural record attached to the record, the facts listed above were considered to be proved, with relevance for the decision.

The fact established as not proved derives from the absence of evidence confirming it, and the common experience of things points, precisely, in the direction of non-proof of the fact in question, since the investigation of the criminal process is conducted – by law – in its own sphere, and can be conducted there by the Tax Authority itself, in accordance with article 40/2 of the RGIT, and not by the party, in the scope of an inspection procedure, especially since the investigatory prerogatives of the criminal process are, naturally, broader than those of the inspection procedure.

B. ON THE LAW

a. on matters of exception

i.

The Respondent begins by raising the exception of absolute material incompetence of the Arbitral Tribunal to know of the claim that is being raised, considering that "the defects that the Claimant invokes are defects susceptible of affecting the legality of the decision of the Director of Finance of Lisbon that fixed the assessable matter relating to PIT for 2005 using indirect methods".

Thus, and as "the Arbitral Tribunal cannot know of 'claims relating to acts determining the assessable matter and acts determining the taxable matter, both by indirect methods, including the decision of the revision procedure'", as provided for in paragraph b) of article 2 of Ordinance no. 112-A/2011, of 22.03", the Tax Authority understands, in short, that "the tribunal should refrain from examining any questions relating to the examination of the illegality of the act of indirect assessment of the taxable matter, absolving the Respondent entity of the claim.".

For its part, the Claimant reports that "never, at any time does the Claimant question the contents of the decision to correct the assessable matter by indirect methods which obviously became consolidated in the legal order following the finality of the judgment of the TCA Sul of 23 July 2012.", and that "What the Claimant intends to have recognized, solely and exclusively, are formal defects inherent to the act of assessment that are subsumed in it and taint it with illegality".

As the Tax Authority correctly notes, "the decision evaluating the assessable matter by indirect methods constitutes a separable act of the tax procedure, susceptible of reaction by taxpayers only through the appropriate means".

And as, also correctly, the Claimant notes, and already pointed out above, in point 1 of the Report, the subject matter of the present arbitral proceeding is the tax act of assessment in the field of Income Tax for Individuals and Compensatory Interest relating to the year 2006, embodied in tax assessment no. 2012 …, dated 10/09/2012, and in compensatory interest assessment no. 2012 …, resulting in a total amount due of € 66,319.54.

Now, one (the act of evaluating the assessable matter by indirect methods) and the other (the act of assessment) are not confused. And since the subject matter of the present arbitral action is the latter act, and not the former, the Tribunal should deem itself competent, in accordance with article 2/1/a) of the LRAT, and article 2 of Ordinance no. 112-A/2011 of 22 March.

Thus, and as was already written in the scope of process 694/2004-T of the CAAD[1]:

"It is true that, in arbitral proceedings, the Tribunal cannot know of 'Claims relating to acts determining the assessable matter and acts determining the taxable matter, both by indirect methods, including the decision of the revision procedure.', as follows from paragraph b) of the said article 2 of the Ordinance.

However, given that the present action does not have as its subject matter 'the decision evaluating the assessable matter by indirect methods', it could not in any case, even if the present action were being heard in a Tax Court, know of claims relating to that act, since that 'constitutes a separable act of the tax procedure', and therefore cannot be covered by the faculty enshrined in article 54 of the CPPT.

In fact, the act of fixing the assessable matter by indirect methods preceding the act impugned in the present arbitral proceedings is directly impugnable, in accordance with nos. 7 and 8 of article 89-A of the LGT.

Thus, the considerations made by the Illustrious Counselor Jorge Lopes de Sousa[2], regarding separable acts of direct assessment, are directly transposable to the present case, when he states that 'the defects that affect the assessment act' (in this case, indirect) 'whether existing in the final assessment act itself, whether relating to the respective assessment procedure, can only be invoked in the respective impugnation and not in the impugnation of assessment acts that may be carried out based on the assessment act'. 'On the other hand, to attack the assessment act, in the respective impugnation, the interested party cannot avail himself of the grounds he has to attack the assessment act' (in this case, indirect) 'and, in particular, cannot argue that the taxable matter to be considered is not that which was used to carry out the assessment.'

That is, in summary: one thing is the impugnation of the indirect assessment act and, another, the impugnation of the assessment act carried out based on that other act.

The present proceeding relates to the second of those cases, and, given the foregoing, one cannot know of 'the defects that affect the assessment act' 'whether existing in the final assessment act itself, whether relating to the respective assessment procedure', since those could only 'be invoked in the respective impugnation'.

With this clarification of the subject matter of the present proceeding, there should be no doubt, it is judged, of the competence of the present arbitral tribunal to know of it.

What was just said will not change if, whether verified or hypothetical, in the impugnation of the assessment act the interested party raises questions relating to defects that affect the assessment act. In fact, the Tribunal only has to assess whether such questions have an impact, or not, on the legality of the assessment act, a judgment for which it is competent, and if it erroneously considers as having such impact a defect of the assessment act autonomously impugnable as such, it will be, not exceeding its competencies (which would only occur if it pronounced on the validity of the assessment act[3]), but, simply, erroneously applying the law, to a question (the validity or otherwise of the assessment act) whose decision falls within its competencies."

Thus, and given all of the foregoing, the first exception raised by the Tax Authority is without merit.

ii.

The Respondent further raises the exception of res judicata.

In its understanding, "the decision evaluating the assessable matter using indirect methods became consolidated in the legal order, and the assessment derived from it cannot be attacked on the ground of defects in the inspection procedure that culminated in that decision, under penalty of violation of res judicata.".

The considerations above-mentioned shall be applicable here, however, mutatis mutandis.

Thus, the defects raised by the Claimant are admissible in the present proceeding, without any violation of res judicata to the extent that they do not put in question the act of indirect assessment of the assessable matter, and if they do, they should, to that extent, obviously be without merit.

In this way, and given the foregoing, the second of the exceptions raised by the Tax Authority is also without merit.

b. on the merits of the case

i. on the violation of article 63/3 of the LGT

The Claimant begins, in the present arbitral proceeding, by arguing the violation of article 63/3 of the LGT, in that, in her understanding, she was subject to 2 external inspection procedures, one in 2008 and another in 2010.

In the Claimant's understanding, "by proceeding to 'reanalyze' the same elements provided by the Claimant, after the first inspection procedure was completed, concluding in a diametrically opposite direction to that which resulted from the first analysis, the services of the Tax Administration incurred a clear and gross violation of the aforementioned articles 36, nos. 2, 3 and 4, of the RCPIT and of 63, no. 3 of the LGT, understood not only in their procedural scope, but also of the right to legal security that emanates from the combination of their respective regimes.", and further that "the violation of these norms constitutes a defect of violation of law, which necessarily has an impact on the consequent acts of fixing the taxable income and assessment of PIT and compensatory interest, which have as their premise and foundation that illegal action, which should therefore be annulled.".

For its part, the Tax Authority considers that "the inspection action carried out by the DSIFAE, under orders DI2007… and DI2007…, had as its objective the mere consultation, collection and cross-referencing of elements, as provided for in paragraph a) of no. 4 of article 46 of the RCPIT, (...d)estined for the prior preparation of the inspection procedure to be carried out at a later time, in accordance with the provisions of no. 2 of article 44 of the RCPIT.", and therefore "the inspection procedure carried out under the service order 2010…, of 14/04/2010, of the Finance Directorate of Lisbon, did not constitute any repetition of inspection acts for the purposes of no. 3 of article 63 of the LGT, with no violation of this legal provision, or of the provisions provided for in nos. 2, 3 and 4 of article 36 of the RCPITA, of article 55 of the LGT or article 266 of the CRP.".

Before proceeding with the analysis of the defect now in question, it is useful to bear in mind that the Claimant's allegation on this matter unfolds in two points, namely:

i. The conduct of two inspection procedures; and

ii. The duplication thereof, with the reanalysis of the same elements, to reach opposite conclusions.

It is in the accumulation of these two circumstances that the Claimant bases her claim, anchoring herself in what was decided in process 14/2012-T of the CAAD.

It is therefore necessary to verify whether, in fact, two inspection procedures occurred or whether, on the contrary and as argued by the Tax Authority, only one occurred.

Upon examination of the factual matter established as proved, the conclusion to be drawn must be that everything indicates that two external inspection actions took place.

In fact, with regard to the second inspection action carried out, it is undisputed that it was an external action.

With regard to the action undertaken in compliance with orders no. DI2007… and no. DI2007…, of the Director of the Directorate of Services for Investigation of Fraud and Special Actions (DSIFAE), it is clear that it was, precisely, the subject of such orders, that it was also the subject of a closure order, notified to the Claimant, and that in the course of it a visit was made to the Claimant's home (who was summoned to provide statements under the RCPIT), in addition to the collection of elements external to the Tax Authority (bank statements).

Now, article 2 of the RCPIT provides, in its no. 1, that "Tax inspection aims at the observation of tax realities, the verification of the fulfillment of tax obligations and the prevention of tax infractions".

Specifying this provision, no. 2 of the same article provides that:

"For the purposes of the preceding number, tax inspection includes the following actions of the tax administration:

a) The confirmation of the elements declared by taxpayers and other obligated parties;

b) The inquiry into tax facts not declared by taxpayers and other obligated parties;

c) The inventory and valuation of goods, movable or immovable, for the purposes of controlling the fulfillment of tax obligations;

d) The provision of official information, on matters of fact, in proceedings for appeals and judicial impugnation of tax acts or contentious appeals of administrative acts in tax matters;

e) The clarification and guidance of taxpayers and other obligated parties on the fulfillment of their duties to the tax administration;

f) The conduct of individual, sectorial or territorial studies on the behavior of taxpayers and other obligated parties and the evolution of the economic sectors in which their activity is engaged;

g) The conduct of expertise or technical examinations of any kind having in mind the purposes referred to in no. 1;

h) Information on the factual prerequisites of tax benefits that depend on the grant or recognition of the tax administration or of rights that the taxpayer, other obligated parties and other interested parties invoke before it;

i) The promotion, in accordance with the law, of the sanctioning of tax infractions;

j) Cooperation, in accordance with international conventions or community regulations, in the scope of prevention and suppression of evasion and fraud;

l) Any other actions of investigation or inquiry that the tax administration is legally charged with."

Regarding the purposes of the tax inspection procedure, article 12 of the RCPIT states that it may have one of two purposes, namely:

"a) Verification and checking procedure, aimed at confirming compliance with the obligations of taxpayers and other obligated parties;

b) Information procedure, aimed at the fulfillment of the legal duties of information or opinion with which tax inspection is legally charged.".

With regard to the place where the procedure is carried out, article 13 of the RCPIT clarifies that:

"As for the place of conduct, the procedure may be classified as:

a) Internal, when inspection acts are carried out exclusively in the services of the tax administration through formal and consistency analysis of documents;

b) External, when inspection acts are carried out, totally or partially, at facilities or premises of taxpayers or other obligated parties, of third parties with whom they maintain economic relations or in any other place to which the administration has access.".

From the regulatory body that has been set forth, it follows not only that the tax inspection procedure is finalistically bound (that is, it can only be instituted with a view to pursuing certain purposes), but also that the internal or external character thereof cannot be arbitrarily fixed by the Tax Administration, but rather results from the necessity or otherwise of carrying out inspection acts "in facilities or premises of taxpayers or other obligated parties, of third parties with whom they maintain economic relations or in any other place to which the administration has access.".

As was written in arbitral process 14-2012-T:

"5 – The criterion for distinguishing between internal and external inspection procedures is extracted from article 13 of the Supplementary Regime of Tax Inspection Procedure, in which it is clarified that the procedure is internal 'when inspection acts are carried out exclusively in the services of the tax administration through formal and consistency analysis of documents' and is external 'when inspection acts are carried out, totally or partially, at facilities or premises of taxpayers or other obligated parties, of third parties with whom they maintain economic relations or in any other place to which the administration has access'.

The criterion for distinguishing between internal and external inspection procedures is thus based on the existence or otherwise of acts carried out outside the services of the Tax Administration to obtain the relevant elements: if the acts were carried out exclusively in those services, one is dealing with an internal procedure; if any or some acts necessary to ascertain the tax facts were carried out outside those services, 'totally or partially', one is dealing with an external procedure.".

And further on, in the same decision:

"An inspection will only be qualifiable as internal when it was carried out based on documents not obtained through inspection acts external to the services.".

Now, taking into account the criteria set forth, one must consider that, contrary to what the Tax Authority maintains, in 2008 an external inspection action took place, targeting the Claimant and the same tax years to which the tax acts subject to the present arbitral proceeding relate, which, moreover, was assumed in the inspection action report itself conducted in 2010, as shown in point 12 of the facts established as proved.

It is concluded, therefore, that two inspection actions took place concerning the same taxpayer (the Claimant), tax and taxation period, with the absence of a decision by the highest official of the service determining the second, based on new facts, in violation of the provisions of article 63/3 of the LGT (as worded at the time; current no. 4).

Having reached this point, it is necessary to determine what the consequences of such violation are.

As was already written in arbitral process 164/2013-T:

"it is considered good that, as expressly referred to in the preamble of the RCPIT, the regulation of the tax inspection procedure aims 'essentially at the organization of the system, and consequently at guaranteeing proportionality to the objectives to be achieved, the security of taxpayers and other obligated parties and their own participation in the formation of decisions.'.

That is, the regulation of the tax inspection procedure has, primarily, an essentially organizational (ordering) purpose and, from the perspective of taxpayers, will essentially aim to define the conditions under which the specific legal effects of such procedure will be reflected effectively in their legal sphere, in addition to ensuring their participation in the decisions to be made.

Regarding this latter aspect, it should be said from the outset that, mindful of the general principle of taxpayers' participation in the formation of decisions that concern them, enshrined in article 60 of the LGT, the essential interests legally relevant to them, in this matter, would always be adequately safeguarded, regardless of the concrete regulation of the tax inspection procedure. In addition to this, it should also be noted that the tax inspection procedure does not, primarily, have a decision-making nature (hence, for example, its final act – the report – is not directly impugnable, insofar as it is not, in itself, injurious), but merely preparatory or ancillary[4], so the necessity to safeguard the participation of taxpayers 'in the formation of decisions', in its scope, will be highly diminished.

In this way, the main purpose, always from the perspective of taxpayers, of the regulation of the tax inspection procedure, and of its observance by the Tax Administration, will reside in the fixing of the legally necessary conditions so that the specific legal effects of the procedure in question are effectively reflected in the legal sphere of taxpayers, in particular the suspension of the deadline for the right to assess taxes by the Administration, in accordance with article 46/1 of the LGT, as well as the subjection of those targeted to the guarantees and prerogatives of tax inspection (articles 28 and 29 of the RCPIT), and to the application of precautionary measures (articles 30 and 31 of the RCPIT).

Thus, and in the wake of what has been set forth, it is considered that the violation of norms regulating the tax inspection procedure will, essentially, have the consequence of preventing certain effects proper to that procedure from occurring, such as the suspension of the deadline for the right to assess taxes, or the obligation to open the facilities of those targeted to tax inspection.

In short, it is considered that the tax inspection procedure does not aim to protect the participation of the taxpayer in the process of gathering information and elements by the Tax Administration, nor, much less, to oblige it to institute such procedure to collect information and elements that it is lawful to obtain, in accordance with the general terms of the legal order, outside that procedure. Similarly, the tax inspection procedure will not aim, in the first place[5], at least, to ensure, by its observance, the reliability or suitability of the information or elements collected.

This, moreover, has been the understanding of the Supreme Administrative Court, and in this regard the Judgment rendered in process 0955/07, on 27-02-2008, can be consulted, in whose summary it reads:

"The inspection and assessment procedures are distinct from each other, even though the latter has a merely preparatory or ancillary character, which does not mean that the illegalities committed in it necessarily project themselves onto the assessment, invalidating it."."

Thus, it is verified that the conduct of a second external inspection action, targeting the same taxpayer, tax and taxation period, without a reasoned decision by the highest official of the service, based on new facts, in violation of the provisions of article 63/3 of the LGT, as worded, does not project itself 'necessarily, onto the assessment, invalidating it', but, simply, precludes the second procedure from producing the effects proper to it, while an external inspection action, such as, for example, the suspension of the deadline for the right to assess, in accordance with article 46/1 of the LGT, the guarantees of the exercise of the inspection function, regulated in articles 28 et seq. of the RCPITA, which will be not only sufficient, but also adequate, to the safeguard of the interests at stake, correctly identified by the Claimant, when she states that the norm in question aims to prevent the 'same taxpayer from being overburdened more than once with the inconveniences that external tax audit actions are susceptible to cause him'.

However, and perhaps for this very reason, the Claimant alleges another point, already noted above, stating that, fundamentally, in addition to the formal duplication of procedures, there was a material duplication, with the reanalysis of the same elements, to reach opposite conclusions, relying, as regards her claim for annulment of the assessments sub iudice, on what was decided in the arbitral judgment rendered in process 14/2012-T of the CAAD.

It happens that the situation now in question is not found to be identical to that examined in those proceedings. In fact, there, after a tax inspection report was drawn up, a 'reanalysis of the elements collected during the external inspection procedure was carried out and a new report was drafted', and it was considered that the ''reanalysis of the working papers produced during the inspection for the year 2001' does not configure a new external inspection procedure with all the procedures provided for in the RCPIT, but, as the acts carried out must be qualified as being of an external inspection procedure, it cannot be concluded otherwise than that it implies a reopening of the external inspection procedure relating to the year 2001', concluding that there would be 'no legal coverage for' such 'reopening of the procedure', recognizing, for this reason, to the Claimant there reason in invoking lack of legal provision for 'reopening, reanalyzing, modifying or promoting amendments to any tax inspection reports finalized, concluded, closed (and with them, also closed the inspection procedure in question)' (art. 28 of the request for constitution of the tribunal), as a ground of illegality of the said 'reanalysis'.".

Now, in the present case, it is not verified that the first inspection procedure resulted in the preparation of any final report, which, analyzing the elements collected, would draw any conclusion from them, so one cannot ratify what was affirmed by the now Claimant, according to which there would have been a 'legal definition of her situation effected following the conclusion of the external inspection procedure', so the second inspection procedure 'violates the Claimant's right not to see the legal situation defined following the first inspection action altered'.

In fact, as was written in the said arbitral judgment 14/2012-T, "The analysis of the elements collected during the external inspection action is part of the scope of the inspection procedure, since it must culminate in a report in which the facts detected and their legal-tax qualification must be identified and systematized, including the 'description of the fiscally relevant facts that alter the declared or to be declared values subject to taxation, with mention and attachment of the means of proof and legal basis for support of the corrections made' [art. 63, nos. 2 and 3, paragraph i), of the RCPIT, relating to the 'conclusion of the inspection procedure'].", and in the case, as was stated, it is not verified that the said report was prepared, so there is no analysis, as presupposed by the Claimant's allegation that in the second inspection procedure it was concluded 'in a diametrically opposite direction to what resulted from the first analysis'.

In this way, given the foregoing, understanding that the violation of article 63/3 of the LGT, as worded, alone does not project itself 'necessarily, onto the assessment, invalidating it', and not ascertaining, contrary to what was alleged by the Claimant, that in the scope of the first inspection action any report was carried out, drawing conclusions from the elements collected, which were contradicted in the final report of the second inspection action, the first defect imputed by the latter to the tax acts sub iudice should be dismissed as without merit.

ii. on the lapse of the right to assessment

Next, the Claimant argues that there will be a lapse of the right to assessment, insofar as:

  • "In the wording at the time of the facts, no. 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.";

  • "For its part, no. 4 of the same article 45 of the LGT also provided that the said lapse period is counted, in periodic taxes, from the end of the year in which the tax fact occurred."

  • "any corrective assessment of the tax declared by the CLAIMANT, by the Tax Administration, would, under penalty of lapse, have to be notified to her by 31 December 2010.";

  • Since the said deadline "was suspended by the effects of the filing of the judicial appeal - on 9 December 2010 -, 21 days remained before the lapse period would be completed which would normally occur on 31 December of that year.";

  • The "decision of the Central Administrative Court of Southern Region that ended the proceeding, which became final (as no appeal was possible from it), was rendered on 23 July 2012.";

  • The "notification of the tax assessment only took place on 10 September 2012.".

The Tax Authority argues in turn that "In the case of the present proceedings, it is clearly evident that the right to assessment concerns facts in relation to which a criminal investigation was instituted, since both proceedings, both the inspection action and the investigation process, relate to the matter of fact concerning income obtained in 2005 which improperly escaped taxation", and therefore "the suspensive effect provided for in no. 5 of article 45 of the LGT, by extending the deadline for the right to assess tax, safeguarded, on the one hand, the right of the Tax Authority to assess tax based on elements ascertained in criminal investigation proceedings, of which it had no knowledge, and also safeguarded, on the other hand, the assessment of tax based on facts ascertained by tax inspection within the same deadline".

In this regard, the said article 45/5 of the LGT provides that:

"Whenever the right to assessment concerns facts in relation to which a criminal investigation was instituted, the period referred to in no. 1 is extended until the filing or conviction becomes final, plus one year."

As was written in the Decision of the Supreme Administrative Court of 01-10-2014, rendered in process 0178/14[6], "The counting of the lapse period of the right to assess taxes in accordance with article 45, no. 5, of the LGT, only occurs if the tax act of assessment and the criminal investigation concern the same facts.".

In the said Decision reliance was placed on the opinion of the Illustrious Prosecutor General Deputy[7], which pointed out, among other things, that "there must be a correspondence between the facts subject to investigation in the criminal process and the facts that constituted the basis for the corrections that gave rise to the additional assessment" and that it is necessary "to ascertain whether such corrections are related to the matter subject to investigation in the criminal process".

Also in the Decision of the Administrative Court of Northern Region of 18-01-2012, rendered in process 00670/08.1BEBRG, it was considered that "for that extension of the lapse period to occur it is imperative that the tax facts underlying the assessment(s) in question have been subject to investigation in criminal proceedings and a criminal investigation has been instituted regarding them 'What is understood, since if there is not the required identity of the facts investigated in the scope of the criminal proceeding and those which constitute the prerequisite for the assessment, one does not see how the pendency of that proceeding can affect the exercise of the right to assess taxes.' [cfr. Decision of the Administrative Court of Northern Region of 22 April 2010]."

Also in the recent Decision of the Administrative Court of Northern Region of 26-03-2015, rendered in process 00478/12.0BEPRT, the previous understandings were reaffirmed, considering that "The extension of the general lapse period provided for in no. 5 of article 45 of the LGT presupposes that the corrections that gave rise to the assessment in question are based on factuality materially investigated in the scope of a criminal investigation;", emphasizing the need to "understand with (...) restrictive scope, (...), the expression '…concerns facts in relation to which a criminal investigation was instituted…'' of article 45, no. 5, of the LGT.

No reasons are apparent – nor are they provided by the Tax Authority – to differ from the jurisprudential understanding set out.

It is thus considered, as the Supreme Administrative Court stated, that it will be a prerequisite for the application of article 45, no. 5, of the LGT, that the tax act of assessment and the criminal investigation concern the same facts, in such a way that there is a correspondence between the facts subject to investigation in the criminal process and the facts that constituted the basis for the corrections that gave rise to the additional assessment.

Further recognition is made, in the wake of the Administrative Court of Northern Region, of the necessity of understanding with (...) restrictive scope, (...), the expression '…concerns facts in relation to which a criminal investigation was instituted…'' of article 45, no. 5, of the LGT, requiring that the tax facts underlying the assessment are the subject of investigation in criminal proceedings, in such a way that the pendency of that proceeding affects the exercise of the right to assess taxes.

That is, in short, it is judged that the extension of the lapse period of the right to assess taxes, to which article 45/5 of the LGT refers, will only operate if it is demonstrated that that right was – effectively and concretely – conditioned by the result of the criminal investigation, thus in line with the preparatory works[8], pertinently recalled by the Claimant, and where it can be read that the "change of the regime of the lapse of the right to assess taxes [was] in the sense of providing that, where the correct ascertainment of tax is dependent on facts ascertained in a criminal investigation, that period is extended until the filing or conviction becomes final, plus one year".

Here arrived, it must be noted that, since it is the Tax Authority that intends to prevail of the norm in question (the provision of no. 5 of article 45 of the LGT), it would be the Tax Authority that, in accordance with article 74/1 of the LGT, was burdened with the demonstration that, effectively and concretely, "the correct ascertainment of tax is dependent on facts ascertained in a criminal investigation", a demonstration that not only was not made, but evidence to the contrary is indicated, insofar as, precisely, the assessment was issued well before the criminal investigation was completed.

In this way, with the prerequisites of the said norm of article 45/5 of the LGT not being demonstrated, the extension of the lapse period enshrined there cannot operate.

For this reason, in the case it would only be to consider the possible suspension of the lapse period in accordance with no. 1 of article 46 of the LGT, a question which, however, was not even raised by the Tax Authority itself to whom, in accordance with the aforementioned article 76/1 of the LGT, it fell to the burden of demonstrating the respective prerequisites.

In accordance with the said norm, "The lapse period is suspended by notification to the taxpayer, in accordance with the law, of the service order or order at the beginning of the external inspection action, ceasing, however, this effect, counting the period from its beginning, if the duration of the external inspection has exceeded six months after notification".

Now, in the case, and as regards the first of the external inspection actions carried out, it is not ascertained that "notification to the taxpayer, in accordance with the law, of the service order or order at the beginning of the external inspection action" has occurred.

On the other hand, and as has already been seen, the second external inspection action, by being illegal – specifically by reason of the absence of "a decision, based on new facts, by the highest official of the service," – is incapable of producing the effects proper to it, in particular as regards the suspension of the lapse period.

Thus, and given all of the foregoing, the assessment in question in the present proceeding having been issued beyond the lapse period, it will be illegal, by violation of article 45/1 of the LGT, and should as such be annulled, thus rendering the question relating to compensatory interest, raised by the Claimant, prejudiced.

The Claimant combines with the claim for annulment of the tax act subject to the present proceedings, the claim for condemnation of the Tax Authority to the payment of indemnity interest on the amount it paid following the tax acts now annulled.

It is a prerequisite for the attribution of indemnity interest that the error in which the Tax Authority labored is imputable to it (cfr. article 43 of the LGT).

In the case at hand, it is manifest that, following the illegality of the tax acts subject to the present proceeding, for the reasons which were pointed out above, there is grounds for reimbursement of the tax borne by the Claimant, by force of the provisions of the said articles 24, no. 1, paragraph b), of the LRAT and 100 of the LGT, since this is essential to "restore the situation that would exist if the tax act subject to the arbitral decision had not been carried out".

It is also clear in the proceedings that the illegality of the tax assessment act impugned is directly imputable to the Respondent, which, on its own initiative, carried it out without legal support, when the right to do so had already lapsed.

By the foregoing, the Claimant has the right to receipt of indemnity interest, in accordance with the provisions of articles 43, no. 1, of the LGT and 61 of the CPPT.

Indemnity interest is owed to the Claimant from the date of payment, until the full reimbursement of the amount paid, at the legal rate.

C. DECISION

In these terms it is decided in this Arbitral Tribunal to deem the arbitral claim well-founded and, in consequence:

a) Annul the tax acts of assessment of PIT and Compensatory Interest relating to the year 2006, embodied in tax assessment no. 2012 …, dated 10/09/2012, compensatory interest assessment no. 2012 …;

b) Condemn the Tax Authority to return the amount improperly paid by the Claimant, plus indemnity interest, calculated from the date of that payment until the date of its full return;

c) Condemn the Tax Authority to pay the costs of the proceedings.

D. Value of the Proceedings

The value of the proceedings is fixed at € 73,805.30, in accordance with article 97-A, no. 1, a), of the Code of Tax Procedure and Process, applicable by force of paragraphs a) and b) of no. 1 of article 29 of the LRAT and of no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration tax rate is fixed at € 2,448.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, payable by the Respondent, since the claim was entirely well-founded, in accordance with articles 12, no. 2, and 22, no. 4, both of the LRAT, and article 4, no. 4, of the said Regulation.

Notify.

Lisbon

18 November 2015

The President Arbitrator

(José Pedro Carvalho - Reporting Arbitrator)

The Arbitrator Vogal

(Jorge Bacelar Gouveia)

The Arbitrator Vogal

(Maria Forte Vaz)

[1] Available at www.caad.org.pt, as is the remaining arbitral jurisprudence cited, without further mention.

[2] "CPPT – Annotated and Commented", Áreas Editora, 2006, Vol. I, p. 425.

[3] Which, moreover, would constitute a pronouncement ultra petitum.

[4] "The tax inspection procedure has a merely preparatory or ancillary character of tax acts or in tax matters" (article 11 of the RCPIT).

[5] Although it may be said, however, that some norms of the regulation in question have concerns at that level, namely those concerning incompatibilities of officials (article 20 of the RCPIT). It cannot, however, be overlooked that such norms are themselves manifestations of other more general ones, of analogous nature (in particular article 44 of the CPA).

[6] Available at www.dgsi.pt, as is the remaining jurisprudence cited, without further mention.

[7] "As very well explained by the Illustrious Prosecutor General Deputy in the learned opinion referred to above - whose argumentation we cannot resist following and transcribing given its clarity, justness and rigor".

[8] Update of December 2005 of the Stability and Growth Programme presented by the XVII Constitutional Government.

Frequently Asked Questions

Automatically Created

What procedural defects in tax inspections can invalidate an IRS assessment in Portugal?
Procedural defects that can invalidate an IRS assessment in Portugal include violations of Article 36 of the RCPIT (Tax Inspection Procedures Code), which requires proper notification of taxpayers and compliance with inspection formalities, and Article 63(3) of the LGT, which mandates that inspection procedures follow specific temporal and formal requirements. Article 55 of the LGT requires the Tax Authority to provide adequate opportunity for taxpayers to be heard. Constitutional protections under Article 266 of the Portuguese Constitution also apply. Key defects include failure to properly notify taxpayers of inspection commencement, conducting inspections without legal authorization, violating the taxpayer's right to participate in the procedure, and failing to complete inspections within statutory timeframes. When such procedural violations occur, courts and arbitral tribunals may declare the resulting tax assessments illegal and annul them entirely.
When does the right to issue an IRS tax assessment expire under Article 45 of the LGT?
Under Article 45(1) of the LGT, the right to issue an IRS tax assessment expires four years after the tax became due, calculated from the end of the year in which the taxable event occurred. For income earned in 2006, the assessment deadline would normally expire on December 31, 2010. However, Article 45 establishes important exceptions: the deadline is suspended when inspection procedures are initiated (Article 63(1) of LGT), criminal proceedings are ongoing for tax offenses, or when the taxpayer files an appeal. The suspension lasts until the procedure is concluded. Critically, Article 63(1) requires that inspection procedures must commence before the original assessment deadline expires to validly extend the period. If an inspection begins after the deadline has already passed, it cannot revive an expired assessment right, and any resulting tax assessment is considered illegal due to expiry (caducidade).
Can a tax inspection initiated after the assessment deadline render the resulting IRS liquidation illegal?
Yes, a tax inspection initiated after the assessment deadline can render the resulting IRS liquidation illegal. Article 63(1) of the LGT explicitly requires that inspection procedures must commence before the expiry of the assessment period established in Article 45 of the LGT. If the Tax Authority begins an inspection after the four-year deadline has already elapsed, this inspection cannot legally extend or revive the assessment right. Any tax assessment issued based on such an inspection is voidable for expiry of the assessment right (caducidade do direito à liquidação). This principle protects taxpayers' legal certainty and prevents indefinite exposure to tax assessments. Courts consistently hold that the timing of inspection commencement is determinative—if the inspection order or first inspection act occurs after the Article 45 deadline, subsequent assessments are illegal regardless of when they are formally issued. The case illustrates this issue where a 2008 inspection was closed, and a new inspection commenced in 2010, potentially after the deadline for 2006 taxes.
What are the legal consequences of violating RCPIT inspection rules (Articles 36 and 63) on tax assessments?
Violating RCPIT inspection rules under Articles 36 and 63, along with Article 55 of the LGT, can result in annulment of the tax assessment. Article 36 of the RCPIT establishes mandatory procedural requirements including proper notification of inspection commencement (paragraph 2), taxpayer rights to accompany the inspection (paragraph 3), and formal requirements for inspection acts (paragraph 4). Article 63 of the LGT governs the temporal aspects of inspections, particularly the requirement that they begin before assessment deadlines expire (paragraph 1) and that they suspend limitation periods (paragraph 3). Article 55 of the LGT guarantees taxpayers' right to prior hearing (direito de audição prévia). Violations of these provisions constitute formal illegalities that can invalidate assessments. Courts distinguish between minor irregularities and substantive violations that prejudice taxpayer rights. Serious violations—such as failing to properly notify the taxpayer, conducting inspections after statutory deadlines, or denying the right to be heard—typically result in complete annulment of the assessment rather than mere correction or reduction.
Are compensatory interest charges valid when the underlying IRS tax assessment is declared illegal?
Compensatory interest charges are not valid when the underlying IRS tax assessment is declared illegal. Compensatory interest, governed by Article 35 of the LGT, is accessory to the principal tax debt and exists to compensate the State for the delayed receipt of tax revenues rightfully due. When an arbitral tribunal or court annuls a tax assessment due to illegality—whether for procedural defects, expiry of assessment rights, or substantive errors—the legal basis for the tax debt disappears retroactively. Since compensatory interest is derivative and dependent on a valid underlying tax obligation, it cannot survive the annulment of the principal assessment. Portuguese tax jurisprudence consistently holds that compensatory interest assessments must be annulled together with the related tax assessments. Therefore, if the IRS assessment is declared illegal for any reason (such as expiry under Article 45 of the LGT or procedural violations), the associated compensatory interest assessment automatically becomes illegal and must also be annulled, entitling the taxpayer to a full refund of any amounts paid.