Process: 20/2019-T

Date: June 6, 2019

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 20/2019-T) addresses the deduction of education and training expenses under Article 78-D of the Portuguese IRS Code for the 2016 tax year. The taxpayer challenged IRS assessment no. 2017..., claiming the Tax Authority failed to recognize €2,509 in education expenses declared in Annex H of their tax return. The dispute arose because the e-fatura system only recorded €1,622.27 in education expenses, creating a discrepancy of €2,509 from the taxpayer's declared amount of €4,131.27. The taxpayer invoked the transitional regime under Article 192 of Law 42/2016, which allowed taxpayers to declare expenses not properly reported by economic agents for 2016, provided they could substantiate these amounts. The Tax Authority argued that while taxpayers could declare amounts exceeding those in e-fatura, they remained obligated to prove expenses beyond communicated values under Article 128 of the IRS Code. The taxpayer claimed the additional amount related to tuition payments made in 2016 for the 2015/2016 academic year (invoice of €4,246 issued September 2015). However, the Authority noted this invoice did not appear in the e-fatura system, questioning the substantiation. This case illustrates the burden of proof requirements for education expense deductions, the limitations of the e-fatura validation system, and taxpayers' rights to challenge assessments through CAAD arbitration when disputes arise over deduction calculations.

Full Decision

ARBITRATION DECISION

I. REPORT

  1. On 10 January 2019, A..., married, taxpayer no. ..., resident at Rua ..., no. ..., ..., in ... (hereinafter Claimant), filed a request for constitution of an arbitration tribunal, pursuant to the combined provisions of articles 2, paragraph 1, subparagraph a), and 10, paragraph 1, subparagraph a), and paragraph 2, of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime of Arbitration in Tax Matters (hereinafter, abbreviated as RJAT), as amended by article 228 of Law no. 66-B/2012, of 31 December, with a view to obtaining the pronouncement of this tribunal regarding:
  • Assessment of the legality of the tax act of Personal Income Tax (IRS) no. ..., of 6 June 2017, relating to the year 2016, corresponding to an amount to be reimbursed of € 3,537.63, with the consequent annulment and processing of compensatory interest owed pursuant to article 43 of the General Tax Law (LGT).

The Claimant attached 11 (eleven) documents.

The Respondent is AT – Tax and Customs Authority (hereinafter, Respondent or AT).

  1. Essentially, the Claimant alleges that the additional IRS assessment no. 2017... is unlawful in that the totality of training and education expenses provided for in article 78-D of the IRS Code were not taken into account.

  2. The request for constitution of an arbitration tribunal was accepted by the President of CAAD and followed its normal proceedings with notification to AT, on 18 January 2019.

  3. The Claimant did not proceed to appoint an arbitrator, whereupon, pursuant to the provisions of article 6, paragraph 2, subparagraph a) and article 11, paragraph 1, subparagraph a) of the RJAT, the President of the Deontological Council of CAAD appointed as arbitrator of the Arbitration Tribunal the signatory, who communicated acceptance of the assignment within the applicable period.

4.1. On 4 March 2019, the Parties were notified of this appointment, and did not express any intention to refuse the appointment of the arbitrator, pursuant to the combined provisions of article 11, paragraph 1, subparagraphs b) and c), of the RJAT and articles 6 and 7 of the Deontological Code of CAAD.

4.2. Thus, in accordance with the provision of article 11, paragraph 1, subparagraph c) of the RJAT, the Arbitration Tribunal was constituted on 25 March 2019.

  1. On 26 March 2019, the Respondent, duly notified for that purpose, filed its Response in which it specifically contested the arguments raised by the Claimant, concluding that the arbitration request was unfounded.

5.1. Essentially and also briefly, it is important to extract the most relevant arguments on which the Respondent based its Response, namely:

The e-invoice system only contains the amount of € 1,622.27 as declared in education expenses (less € 2,509.00 than that declared by the Claimant in its Personal Income Tax Form 3 return), a value that gave rise to the divergence underlying this dispute.

In accordance with article 192 of Law no. 42/2016, of 28 December, under the heading "Transitional measures on deductions from the tax liability to apply to the personal income tax return relating to the year 2016", the following is provided:

"1 - Without prejudice to the provisions of articles 78-C to 78-E and 84 of the IRS Code, as regards the determination of deductions from the tax liability by AT, IRS taxpayers may, in the personal income tax return for the year 2016, declare the amount of expenses referred to in those articles.

2 - The exercise of the faculty provided for in the preceding number means, for the purposes of calculating the deductions from the tax liability provided for in articles 78-C to 78-E and 84 of the IRS Code, the consideration of the values declared by taxpayers, which replace those that have been communicated to AT in accordance with the law.

3 - The exercise of the faculty provided for in paragraph 1 does not exempt the obligation to substantiate the amounts declared relating to the expenses referred to in articles 78-C to 78-E and 84 of the IRS Code, regarding the part that exceeds the value previously communicated to AT, and in accordance with the general provisions of article 128 of the IRS Code."

With the establishment of this transitional regime, the legislator sought to safeguard taxpayers from situations of non-compliance with declarative obligations by economic agents, particularly given that this was a completely new legal regime, which would result in the non-consideration of charges that could otherwise be eligible for deduction from the tax liability.

Furthermore, through paragraph 4 of the cited article 192, the legislator sought only to distinguish the means of reaction and respective period available to taxpayers depending on whether the matter of disagreement concerned expenses capable of constituting deductions from the tax liability relating to deductions for dependents and ascendants (cf. article 78-A of the IRS Code) or expenses capable of constituting deductions for health, training and education, real estate charges, among others (cf. 78-C to 78-E and 84 of the IRS Code).

From the simple reading of the rule in question, it does not follow that charges recorded in the Personal Income Tax Form 3 return by taxpayers, even if different from those declared by declaring economic agents, exempt them from proof of the expenses declared.

The legislator intended that, in situations of non-compliance or improper compliance by economic agents, natural persons should not be prejudiced and could declare and deduct the expenses borne in that year provided they were duly substantiated.

In the case at hand, the Claimant, called upon to provide justification, indicated that the value declared in Annex H refers to an invoice issued on 1 September 2015, in the amount of € 4,246.00, from the educational establishment of the dependent, B..., S.A. (NIF...), for the academic year 2015/2016, attaching receipts relating to the period/payment of 2016, in the amount of € 2,509.00.

However, that invoice (in the amount of € 4,246.00) does not appear in the e-invoice system, so the Claimant failed to substantiate the charge indicated.

5.2. The Respondent did not request the production of evidence.

  1. By order of 3 May 2019, the Parties were notified of the decision of the Arbitration Tribunal to dispense with the holding of the meeting referred to in article 18 of the RJAT, with 7 June 2019 being fixed as the deadline for issuing the arbitration decision.

  2. The Parties submitted submissions, respectively, on 14 and 23 May 2019.

II. CLARIFICATION OF ISSUES

The Arbitration Tribunal was regularly constituted and is competent ratione materiae, given the nature of the subject matter of the proceedings (cf. articles 2, paragraph 1, subparagraph a) and 5 of the RJAT).

The request for arbitration pronouncement is timely, as it was submitted within the period provided for in article 10, paragraph 1, subparagraph a), of the RJAT.

The parties have legal personality and capacity, have standing and are regularly represented (cf. articles 4 and 10, paragraph 2 of the RJAT and article 1 of Order no. 112-A/2011, of 22 March).

The proceedings are not vitiated by nullities, and no exceptions or preliminary questions have been raised that would prevent consideration of the merits, and it is appropriate to proceed to the merits.

III. REASONING

III.1. FACTS

§1. FACTS ESTABLISHED

The following facts are considered established:

a) The Claimant, together with the spouse, C... (NIF...), filed the Personal Income Tax Form 2 return relating to the year 2016, indicating one dependent (NIF...), further declaring, as education expenses, the amount of € 4,131.27 (cf. Annex H).

b) Upon analyzing the e-invoice system, the Respondent found that the same only contains the amount of € 1,622.27 as declared in education expenses (less € 2,509.00 than that declared by the Claimant in the Personal Income Tax Form 3 return), having given rise to a divergence.

c) Called upon to provide justification, the Claimant indicated that the value declared in Annex H concerns an invoice issued on 1 September 2015, in the amount of € 4,246.00, from the educational establishment of the dependent, B..., S.A. (NIF...), for the academic year 2015/2016, attaching receipts relating to the period/payment of 2016, in the amount of € 2,509.00.

d) In the academic year 2015/2016, the dependent attended the 12th year at the private educational establishment B..., S.A., of....

e) The dependent ceased to attend that educational establishment in the academic year 2016/2017, having enrolled at University.

f) The Claimant submitted, on 4 July 2017, a petition for administrative review requesting the reassessment of IRS assessment no. 2017..., of 6 June 2017, and was notified of the draft rejection decision through Office Letter no. ..., of 16 November 2017 to, if desired, exercise the right to be heard.

g) The Claimant was notified of the decision to reject the petition for administrative review through Office Letter no. ..., of 20 December 2017, having submitted a hierarchical appeal, and was notified of the draft order for rejection of 18 September 2018 to, if desired, exercise the right to be heard.

h) The Claimant submitted, on 10 January 2019, the present request for arbitration pronouncement.

§2. FACTS NOT ESTABLISHED

With relevance for the assessment and decision of the case, no unproven facts emerge.

§3. REASONING ON MATTERS OF FACT

The facts pertinent to the judgment of the case were selected and identified in function of their legal relevance, in light of the plausible solutions to the questions of law, in accordance with the combined application of articles 123, paragraph 2, of the CPPT, 596, paragraph 1 and 607, paragraph 3, of the Code of Civil Procedure (CPC), applicable by virtue of article 29, paragraph 1, subparagraphs a) and e), of the RJAT.

With regard to the proven facts, the Tribunal's conviction was based on the facts articulated by the Parties, whose correspondence to reality was not challenged and therefore admitted by agreement, on the critical analysis of the documentary evidence contained in the file, including the administrative proceedings.

III.2. LAW

Law no. 82-E/2014, of 31 December, which came into force on 1 January 2015, carried out a reform of the taxation of natural persons, introducing relevant amendments to the IRS Code, particularly with regard to procedures relating to the calculation of deductions from the tax liability.

To that extent, in the context of IRS, amounts borne by any member of the household unit that cumulatively meet the requirements referred to in article 78-D, paragraph 1, of the IRS Code are deductible as education expenses, namely:

a. Are included in invoices that constitute service provision and acquisition of goods, exempt from Value Added Tax (VAT) or taxed at the reduced rate;

b. Are communicated to AT in accordance with Decree-Law no. 198/2012, of 24 August;

c. The issuers are classified, in accordance with the Portuguese Classification of Economic Activities, Revision 3 (CAE - Rev. 3), approved by Decree-Law no. 381/2007, of 14 November, in the following economic sectors:

i. Section P, class 85 - Education;

ii. Section G, class 47610 - Retail trade of books, in specialized establishments;

iii. Section G, class 88910 - Child care activities, without accommodation.

On the other hand, and in accordance with the provisions of article 192 of Law no. 42/2016, of 28 December, which defined transitional measures on deductions from the tax liability to apply to the personal income tax return relating to the year 2016:

  1. Without prejudice to the provisions of articles 78-C to 78-E and 84 of the IRS Code, as regards the determination of deductions from the tax liability by AT, IRS taxpayers may, in the personal income tax return for the year 2016, declare the amount of expenses referred to in those articles.

  2. The exercise of the faculty provided for in the preceding number means, for the purposes of calculating the deductions from the tax liability provided for in articles 78-C to 78-E and 84 of the IRS Code, the consideration of the values declared by taxpayers, which replace those that have been communicated to AT in accordance with the law.

  3. The exercise of the faculty provided for in paragraph 1 does not exempt the obligation to substantiate the amounts declared relating to the expenses referred to in articles 78-C to 78-E and 84 of the IRS Code, regarding the part that exceeds the value previously communicated to AT, and in accordance with the general provisions of article 128 of the IRS Code.

  4. Regarding the year 2016, the provision of paragraph 7 of article 78-B of the IRS Code is not applicable to the deductions from the tax liability contained in articles 78-C to 78-E and 84 of the IRS Code, being replaced by the mechanism provided for in the preceding paragraphs.

As results from the established facts and, immediately recognized by the Respondent, the "(...) educational establishment declared an invoice in the amount of €4,246.00, on 01-09-2015, in the name of the mother of the dependent, C..., which the Claimant alleges concerns the academic year 2015/2016, having substantiated this, in the justification of the divergence, by attaching 6 receipts issued between 14-01-2016 and 07-07-2016 in the amount of €2,509.00." (emphasis ours).

Indeed, although that invoice (in the amount of € 4,246.00) does not appear in the e-invoice system, the Claimant substantiated, through the documents attached to the proceedings, the divergence in the charges relating to education expenses indicated by him in the Personal Income Tax Form 3 return for the year 2016.

Furthermore, the Respondent states that "(...) it is not confirmed that the said value of €4,246.00 was not considered in full by the taxpayers in their respective IRS return (annex H) in the year 2015 since the amount of €5,500.75 was indicated as education expenses (...)".

Notwithstanding the foregoing, the Respondent failed to rebut the presumption of truthfulness of the personal income tax return provided for in article 75, paragraph 1 of the LGT.

IV. DECISION

With the grounds set out above, the arbitration tribunal decides:

a) To uphold the request for arbitration pronouncement, concluding that the additional IRS assessment no. 2017... is annulled, with the consequent effects, including the processing of compensatory interest;

b) To order AT to pay the costs of the proceedings.

VALUE OF THE PROCEEDINGS

In accordance with the provisions of articles 306, paragraph 2, of the CPC ex vi article 29, paragraph 1, subparagraph e), of the RJAT, 97-A, paragraph 1, subparagraph a), of the CPPT ex vi article 29, paragraph 1, subparagraph a), of the RJAT and 3, paragraph 2, of the Rules of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at € 3,537.63 (three thousand five hundred and thirty-seven euros and sixty-three cents).

COSTS

Pursuant to the provisions of articles 12, paragraph 2, and 22, paragraph 4, of the RJAT, 4, paragraph 4, and Table I annexed to the Rules of Costs in Tax Arbitration Proceedings and article 527, paragraphs 1 and 2, of the CPC ex vi article 29, paragraph 1, subparagraph e), of the RJAT, the amount of costs is fixed at € 612.00 (six hundred and twelve euros), to be borne by the Respondent.

Lisbon, 6 June 2019.

The Arbitrator,

(Hélder Faustino)

Frequently Asked Questions

Automatically Created

What education and training expenses can be deducted from IRS under Article 78-D of the Portuguese IRS Code?
Under Article 78-D of the Portuguese IRS Code, taxpayers may deduct education and training expenses incurred for themselves, their spouse, and dependents. These expenses include tuition fees, school supplies, textbooks, and other education-related costs paid to qualified educational institutions. For the 2016 tax year, a transitional regime under Article 192 of Law 42/2016 allowed taxpayers to declare education expenses in their tax return even if not properly communicated by economic agents through the e-fatura system, provided they could substantiate these amounts with proper documentation such as invoices and receipts.
How does the e-fatura system affect the validation of education expense deductions in IRS?
The e-fatura system serves as the primary validation mechanism for education expense deductions in Portuguese IRS. The Tax Authority cross-references amounts declared by taxpayers in their tax returns against expenses registered in the e-fatura system by economic agents (schools, educational institutions). Discrepancies trigger scrutiny and potential reassessments. However, under the 2016 transitional regime (Article 192, Law 42/2016), taxpayers could declare amounts exceeding e-fatura records, but bore the burden of substantiating the additional expenses under Article 128 of the IRS Code. This means providing invoices, receipts, and proof of payment. The system's reliability depends on proper compliance by educational institutions in reporting expenses to the Tax Authority.
Can taxpayers challenge IRS assessments that fail to include all declared education expenses?
Yes, taxpayers can challenge IRS assessments that fail to include declared education expenses through CAAD (Centro de Arbitragem Administrativa) arbitration tribunals. Under Articles 2 and 10 of the RJAT (Legal Regime of Arbitration in Tax Matters), taxpayers may request arbitration to contest the legality of tax assessments. In this case, the taxpayer challenged an assessment that excluded €2,509 in education expenses, seeking annulment of the assessment and payment of compensatory interest under Article 43 of the LGT. Taxpayers must file within the statutory deadlines and demonstrate that the Tax Authority incorrectly calculated deductions. The burden of proof lies with taxpayers to substantiate expenses exceeding amounts recorded in e-fatura, particularly for the 2016 transitional regime.
What is the role of CAAD arbitral tribunals in resolving disputes over IRS tax deductions in Portugal?
CAAD arbitral tribunals provide an alternative dispute resolution mechanism for Portuguese tax controversies, including IRS deduction disputes. Under the RJAT (Decree-Law 10/2011), taxpayers can request arbitration instead of pursuing judicial review in administrative courts. The tribunal, composed of independent arbitrators appointed by CAAD's Deontological Council, reviews the legality of tax assessments and decisions. In education expense disputes, tribunals evaluate whether the Tax Authority properly applied Articles 78-D and related provisions, assess the validity of substantiation provided by taxpayers, and determine if deductions were correctly calculated. Decisions are binding and enforceable. This process offers faster resolution than traditional court litigation, typically with decisions issued within months of constitution.
Are compensatory interest (juros indemnizatórios) available under Article 43 of the LGT when IRS assessments are found illegal?
Yes, compensatory interest (juros indemnizatórios) are available under Article 43 of the Portuguese General Tax Law (LGT) when IRS assessments are found illegal. If a taxpayer successfully challenges an assessment through CAAD arbitration and the tribunal annuls the tax act, the State must pay compensatory interest on amounts improperly collected or withheld. This compensation recognizes the taxpayer's loss of use of funds due to the Tax Authority's illegal action. The interest rate and calculation method are established by law. In this case, the taxpayer explicitly requested processing of compensatory interest as part of the relief sought, anticipating that if the €2,509 education expense deduction was improperly denied, resulting in underpayment of the refund due, the State would owe interest on that amount from the date of the illegal assessment until correction.