Summary
Full Decision
ARBITRAL DECISION
1. REPORT
A…, with NIF … and his wife, B…, with NIF…, residing at Rua…, no.…, …, Dt.º, in Lisbon (area of the Lisbon Tax Authority …), the first hereinafter referred to as Claimant and both, jointly, as Claimants, hereby, pursuant to the combined provisions of articles 2, no. 1, paragraph a), and 10, no. 1, paragraph a), of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime for Tax Arbitration (RJAT), request the constitution of an Arbitral Tribunal, with the intervention of a sole arbitrator, wherein the Tax and Customs Authority (hereinafter referred to as TA) is the Respondent, with a view to declaring the illegality and consequent annulment of the additional assessment of Personal Income Tax (IRS) with no. 2015…, referring to the year 2011, whose notice of assessment, issued on 25 November 2015, in the amount of € 4,401.11, which includes compensatory interest of € 535.83 and with a payment deadline of 4 January 2016, was paid by them on 2 January 2016.
Cumulatively, the Claimants request the condemnation of the Respondent to refund the amount paid and payment of indemnificatory interest, pursuant to article 43 of the General Tax Law (LGT), from the date of the wrongful payment.
In support of their claim, the Claimants invoke the factual and legal grounds which, summarily, are set out below:
a. On 4 November 2011, the Claimant and his three siblings divided the inheritances of their deceased Parents, whose estates opened, the Mother's on 28 July 1983 and the Father's on 2 April 1996;
b. The Claimant's Mother's inheritance consisted exclusively of real property and the Father's of real property and cemetery rights;
c. To fill the "overall" hereditary share of € 136,132.50, the Claimant received real property worth a total of € 107,700.00, cemetery rights valued at € 1,037.50 and equalizing payments (tornas) of € 27,395.00;
d. The Claimant's proportional share of his Mother's inheritance was € 41,669.06 and its onerous alienation was excluded from the incidence of capital gains, by virtue of article 5 of Decree-Law no. 442-A/88, of 30 November, which approved the Personal Income Tax Code;
e. His proportional share of his Father's inheritance was € 94,463.44, with capital gains applying only to the portion of equalizing payments corresponding to the onerous alienation of rights over the real property composing it, excluding cemetery rights, both because they are not considered real property, and because they were allotted to him in the same proportion as to each of his siblings, that is, in ¼ of the respective value for each heir;
f. The Claimants submitted, on 23 April 2012, by electronic means, the IRS tax return form 3 for income in the year 2011, in which they included only schedules A (income category A/H) and H (deductions from tax and tax benefits);
g. By official letter from the Lisbon Tax Authority …, of 25 May 2015, the Claimant was notified to, within a period of 10 days, present schedule G to the IRS tax return form 3 for the year 2011, in which he should declare the partition of 4 November of that year, with a warning that, if he failed to do so, an official assessment would be issued, pursuant to article 76 of the Personal Income Tax Code;
h. In a petition dated 22 June 2015, addressed to the Chief of the Lisbon Tax Authority …, the Claimant provided the clarifications he deemed necessary for the additional IRS assessment for 2011, enclosing a copy of the Inheritance Tax assessment effected by the Tax Authority of …, on 12 February 1998, relating to the inheritance opened by death of his Father;
i. To the same petition, in which the Claimant expressed doubts as to the completion of schedule G (and G1), designed to declare the onerous transfer of real property and not that of hereditary shares, as was the case, he attached listings of the real property composing each of the distributed inheritances and of those that fell to him in each, for completion of schedules G (field 401) and G1 (field 501) and determination of taxable capital gains;
j. On 17 December 2015, a certificate was issued by the Lisbon Tax Authority …, at the request of the Claimant, containing the reasoning for the values entered in schedules G and G1 of the official return that gave rise to the contested assessment, with which the Claimants do not agree;
k. The Claimants consider that the values calculated by the TA did not take into account, among other aspects, neither the fact that the partition concerns two hereditary shares relating to inheritances opened at fiscally differentiated times with respect to capital gains taxation, nor the value of acquisition (gratuitous) of the property composing the Claimant's proportional share in his Father's inheritance, for correct calculation of the tax due for receipt of equalizing payments;
l. Furthermore, that the Claimant's share was primarily filled with property from his Father's inheritance, the difference between the share to which he was entitled in his Mother's inheritance and the property he received from it in the partition being greater, to which corresponds the greater part of the equalizing payments received, excluded from taxation by virtue of article 5 of Decree-Law 442-A/88, of 30 November;
m. However, the TA resolved everything with a simple rule of three, taking as reference the sum of both hereditary shares (overall hereditary share) and the value of the equalizing payments received by the Claimant, which it divided proportionally, without taking into account the actual allocation of those payments to each of the inheritances;
n. The IRS assessment for the year 2011 suffers from the defects of lack of reasoning and violation of law, due to error in the determination of the acquisition and realization values of the portion of the hereditary shares of the Claimant's Mother and Father, and only the portion of equalizing payments to be allocated to the latter would generate capital gains income.
Finally, the Claimants seek the annulment of the acts of IRS assessment for the year 2011 and compensatory interest, assigning to the claim an economic value of € 4,404.11.
Notified in accordance with the terms and purposes provided for in article 17 of the RJAT, the TA presented a response and attached the administrative file, arguing that the IRS assessment that is the subject of the present request for arbitral decision should be maintained, invoking, in summary, the following reasons:
a. The claim relates to the annulment of the additional IRS assessment no. 2015…, for the year 2011, on the grounds of the defects of lack of reasoning and violation of law, due to error in the determination of the acquisition and realization values in the taxation of equalizing payments, in the amount of € 27,395.00, paid to the Claimant as part of a partition deed, executed in November 2011, following the death of the Mother (in 1983) and the Father (in 1998);
b. However, in the TA's view, no defect can be attributed to the assessment that would call into question its legality and validity;
c. The Claimants submitted the Model 3 IRS return on time for the year 2011, without completion of schedule G;
d. Having the TA become aware of the partition deed of 4 November 2011, the Claimant was notified to, within a period of 10 days, "submit a Model 3 IRS return for the year 2011, with schedule G, declaring the partition made on 4/11/2011, as per copy of the deed sent by the Tax Authority …", and that "If the respective return in default is not submitted, an official return will be prepared by the services";
e. The Claimant did not comply with what was requested and, consequently, an official return was prepared, pursuant to article 76 of the Personal Income Tax Code, based on the elements contained in the partition deed, from which the contested assessment resulted;
f. Only on 22 June 2015 did the Claimant present "an argumentative statement" of the values that should be entered in Schedule G, "as well as a copy of the return with corrections, partly filled in by hand and partly with the indication 'see supplement'", which does not amount to the presentation of a substitute return;
g. The equalizing payments received by the Claimant, in the amount of € 27,395.00, necessarily correspond to property (or part of property) that would have fallen to him in the overall hereditary share of € 136,132.50 and which he allotted/alienated to another heir, without the TA needing to know which property or part of property the payments relate to;
h. To calculate the capital gains due, the TA only needs to know that the value of the equalizing payments corresponds to 21% of the inheritance quota to which the Claimant was entitled by death of his Parents;
i. Given that the value to which the Claimant was entitled by inheritance from the Mother was € 41,631.56, the amount of € 8,742.56, corresponding to 21% of that value, was entered in Schedule G1 of the official return, which was excluded from taxation;
j. In completing Schedule G of the official return, the TA started from the same value that is invoked by the Claimant, as his inheritance quota due to death of the Father, of € 94,463.44, to which it applied the same percentage of 21%, obtaining the realization value of € 19,837.32;
k. It was the Claimant's responsibility to indicate and demonstrate the acquisition values – which he did not do in a timely manner, as he did not submit the substitute return within the deadline of the notification sent to him for that purpose;
l. The IRS assessment computer system requires the entry of a positive acquisition value for calculating capital gains; being unaware of the actual acquisition value, the TA fictioned the value of € 0.01;
m. The assessment does not also suffer from the defect of lack of reasoning, as the Claimant demonstrates, in his argument, that he understood precisely the TA's arithmetic operations and their reason;
n. The contested tax act does not suffer from any defect that would call into question its legality and validity, and therefore there is no basis for payment of any interest by the TA.
The TA concludes by, having attached a copy of the petition submitted by the Claimant to the Chief of the Lisbon Tax Authority … on 22 June 2015 and the administrative file prepared by the same Tax Authority, advocating the "total lack of merit of the claim, due to lack of legal support".
The request for constitution of the Arbitral Tribunal was filed with CAAD on 31 March 2016 and was accepted by the Honorable President of CAAD and automatically notified to the TA.
The Claimants informed that they did not intend to exercise the right to appoint an arbitrator, and therefore, pursuant to article 6, no. 1, of the RJAT, the undersigned was appointed arbitrator by the Honorable President of the Deontological Council of CAAD, which responsibility was accepted within the legally provided period, without opposition from the Parties.
The Sole Arbitral Tribunal was properly constituted on 13 June 2016 and has material jurisdiction to hear and decide the dispute that is the subject of these proceedings.
The Parties possess legal personality and capacity, are entitled to bring the action and are duly represented (articles 4 and 10, no. 2, of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March).
The proceedings do not suffer from any nullities and no exceptions were raised.
No additional evidence being requested and no correction of procedural documents being necessary, the hearing referred to in article 18 of the RJAT was dispensed with, and the Parties were invited to submit successive written submissions within ten days.
Both Parties submitted written submissions, in which they reiterated the positions contained in their initial pleadings.
2. FACTUAL MATTERS
The documents attached to the proceedings by the Parties prove the following factual circumstances, which are of interest to the decision of the case:
a. The Claimants submitted, on 23 April 2012, by electronic means, the Model 3 IRS return for income in the year 2011 (return no. …), in which they included schedules A (pension income) and H (deductions from tax and tax benefits);
b. Pursuant to official letter no. … from the Lisbon Tax Authority…, issued under registration RD … PT, of 26 May 2015, with the subject "Notification for prior hearing", the Claimant was notified that, within ten days, he should submit, at that Tax Authority or by Internet, the Model 3 IRS return for the year 2011, as missing, with schedule G, in order to declare the partition made on 4 November of that year, indicating the elements of the household aggregate (income and expenses), with a warning that, if he failed to do so within the indicated period, an official assessment would be prepared based on the elements available in the TA's computer system, in accordance with article 76 of the Personal Income Tax Code;
c. The partition deed referred to in the previous paragraph was executed on 4 November 2011, at the Notarial Office in charge of Licensed Notary C…, in …, registered at pages …/… v.º of Book…, in which the Claimant and his three siblings were parties, in their capacity as heirs of their deceased Parents;
d. The aforementioned partition deed contains the description of the following facts:
i. On 2 April 1996, in …, the Claimant's Father died intestate, in the status of widower of the Claimant's Mother, leaving four descendants of the first degree, who partition the separate property of each parent and also their common property;
ii. On 28 July 1983, in …, the Claimant's Mother died, in the status of married to the Claimant's Father, without leaving a will, and leaving as heirs the spouse and the four descendants already mentioned;
iii. The separate property of the Claimant's Father (real property and cemetery rights) totals the amount of € 164,060.00;
iv. The separate property of the Claimant's Mother (exclusively real property) totals the amount of € 64,000.00;
v. The common property of the Claimant's Father and Mother (exclusively real property) totals the amount of € 316,470.00;
vi. By the death of the Claimant's Mother, her inheritance (separate property and her share in the common property), in a total of € 222,235.00, was divided into four equal parts, being ¼ the legitimate share of the surviving spouse and the remaining ¾, the legitimate share of his four children, in equal parts;
vii. The inheritance of the Claimant's Father (separate property, share in common property and legitimate share of his Wife) in a total of € 377,853.75, was divided into four equal parts, each corresponding to the legitimate share of each child;
viii. Each of the children received a hereditary share from Father and Mother (overall hereditary share), in the value of € 136,132.50;
ix. The Claimant was allotted the property identified in items 4, 5, 6, 7, 18, 19, 25 and 29 and ¼ undivided share of each of items 15, 16 and 17, in the total value of € 108,737.50; to fill his share, he received equalizing payments (tornas) in the amount of € 27,395.00;
x. Items nos. 4, 5, 6, 7, 15, 16 and 17 relate to separate property of the Claimant's Father, with the last three relating to cemetery rights; items nos. 18, 19 and 25 relate to separate property of the Claimant's Mother and item no. 29 corresponds to property common to both parents;
e. On 22 June 2015, the Claimant submitted a petition to the Chief of the Lisbon Tax Authority …, to which he attached a copy of the Model 3 IRS return for the year 2011, submitted on 23 April 2012, accompanied by schedules G and G1;
i. In table 4, field 401, of schedule G – "Onerous alienation of real rights over real property – art. 10, no. 1, paragraph a), of the Personal Income Tax Code", the year and month of realization (2011-11) and the value of € 7,850.93 were entered, as well as the year and month of acquisition (1996-04), for the value of € 1,684.41;
ii. In the same table 4 – "Identification of property by registration" field 401, the expression "See supplement" was entered – this supplement consists of a typewritten sheet containing the registration identification of the real property allotted to the Claimant in the partition of the paternal inheritance;
iii. In schedule G1, table 5 – "Real property alienated excluded or exempt from taxation", the date of acquisition (1983-07-28), the realization value (€ 4,615.00) and the acquisition value (€ 1,227.33) were entered, with the indication of "See supplement", which consisted of a typewritten sheet with the list of real property belonging to the inheritance of his Mother;
iv. The Claimant also attached, in addition to other documents, a copy of the Inheritance Tax assessment relating to the inheritance of his Father, effected by the … Tax Department of …, on 12 February 1998, which includes the identification of the real property and cemetery rights transferred, as well as the values that served as their basis;
f. The additional IRS assessment for the year 2011 with no. 2015…, of 20 November 2015, gave rise to statement of reconciliation no. 2015 … and statement of compensatory interest calculation no. 2015…, in a total value of € 4,404.11, with a voluntary payment deadline of 4 January 2016;
g. On 17 December 2015, at the request of the Claimant, the Lisbon Tax Authority … issued a certificate containing the text of the correction document that served as the basis for the contested assessment, to which it added the reasoning for the calculation of the values entered in schedules G and G1 of the official return, as follows:
i. In schedule G1 were included the values relating to the Claimant's Mother's inheritance, opened on 28 July 1983 and composed of the value of all of his separate property and his share in the common property, in a total of € 222,035.00, being ¼ the legitimate share of the surviving spouse and the remaining ¾ to be divided among the four children, falling to each one the value of € 41,631.56;
ii. To schedule G were carried the values of the property of the Claimant's Father's inheritance, composed of the value of all of his separate property, the value of his share in the common property of the couple and the legitimate share in the inheritance of his Wife, totaling € 377,853.75 of which falls to each of the four children the value of € 94,463.43;
iii. The total value of the Claimant's share is € 136,132.50 (€ 41,631.56 from the maternal share and € 94,463.43 from the paternal share), having received property in the value of € 108,737.50 and equalizing payments in the value of € 27,395.00;
iv. To find the value of the equalizing payments to be allocated to each part of the inheritance, a simple rule of three was applied using the total value of the share and the value of the property allotted to the Claimant, which corresponds to the percentage of 79%, the percentage of the equalizing payments being 21%;
v. The percentage of 21% was applied to the value of the equalizing payments received by the Claimant, which resulted in the value of € 8,72.62 (the TA's Response refers to the amount of € 8,742.56) of equalizing payments relating to the inheritance opened by the death of the Mother, entered in schedule G1 and € 19,837.32 of equalizing payments relating to the inheritance of the Father;
h. The Claimants proceeded to pay the contested assessment in the total amount of € 4,404.11 on 2 January 2016.
2.2. Reasoning for the factual matters proven:
The Tribunal's conviction regarding the factual matters given as proven resulted from critical analysis of the documentary evidence attached to the request for arbitral decision and the response and administrative file sent to the proceedings by the Respondent.
2.3. Facts not proven
There are no facts relevant to the decision of the case that should be considered as not proven.
3. LEGAL MATTERS – REASONING
3.1. Delimitation of the question to be decided:
The question brought before these proceedings by the Claimants consists in determining whether the official determination of capital gains income resulting from receipt of equalizing payments in the composition of the shares to which the Claimant was entitled in the inheritances opened by the death of his Mother, on 28 July 1983, and his Father, on 2 April 1996, was correct, and which was the basis for the additional IRS assessment for the year 2011, which is the subject of this request for arbitral decision.
Both Parties agree that, in the partition deed executed on 4 November 2011, in which the Claimant and his three siblings executed as coheirs, the inheritances of both parents were partitioned and that the Claimant's hereditary shares were € 41,669.06 (the TA indicates the value of € 41,631.56, which does not significantly differ from the value indicated by the Claimants) in his Mother's inheritance, and € 94,463.44 in his Father's inheritance.
What the Parties disagree on is the manner of calculating the taxable capital gains, taking into account the value of each of the hereditary shares, as while the TA seeks to allocate proportionally to each of them the equalizing payments received by the Claimant (realization value), the Claimant argues that the value of the equalizing payments to be allocated to each of the hereditary shares is derived from the difference between the value of the property received and the value of his share in each one of the inheritances.
The Parties also disagree regarding the acquisition value that served as the basis for calculating the capital gains, which the Claimant argues should be the value considered in the Inheritance Tax assessment upon the death of his Father and not the fictioned value by the TA of € 0.01.
Given the disagreements noted, the Claimants argue the illegality of the contested assessment, due to error in the determination of the realization value and in the determination of the acquisition value, which ultimately result in the erroneous quantification of the taxable capital gains income and, further, the lack of reasoning of the same assessment, grounds that can be framed within paragraphs a) and c), respectively, of article 99 of the Code of Tax Procedures and Process (CPPT).
It is therefore necessary to analyze the question raised in the request for arbitral decision and decide the dispute that opposes the Claimants to the TA.
3.2. On the error in the determination of the realization value:
According to article 10, no. 1, paragraph a), of the Personal Income Tax Code, in the wording in force at the time of the facts, "1 - Capital gains are gains obtained which, not being considered business and professional income, capital or real property income, result from:
a) Onerous alienation of real rights over real property and allocation of any property from the personal heritage to business and professional activity carried out in the individual name by its owner;
(...)".
The Parties agree that the transfer of real rights over real property whose value, in the partition, would be part of the hereditary share of one of the heirs, through payment of equalizing payments by the one who takes property of greater value than the share that would fall to him in the inheritance, constitutes a situation that can be framed within the provision of the rule of incidence in article 10, no. 1, paragraph a), of the Personal Income Tax Code.
It becomes indispensable, therefore, for calculating the income subject to IRS, to previously know the realization value which, in the case of partition of the inheritance, will be that of the respective consideration (see article 44, no. 1, paragraph d), of the Personal Income Tax Code), equivalent to the equalizing payments received by the heir who took property of less value than his hereditary share, in this case, the Claimant.
In the specific case before us, as demonstrated by the factual circumstances proven above, although only one partition deed was executed, two inheritances were partitioned in it, that of the Mother and that of the Father of the Claimant, and this one had the right to two hereditary shares, one from each parent.
It therefore seems evident that the equalizing payments received through transfer of part of each of those hereditary shares would correspond to the difference between the property that, in each inheritance, fell to the Claimant in the partition, and the value of the share that he held in each one of them.
Accordingly, it appears that the TA is not correct in its assertion that "The TA does not know, nor needs to know, which property or part of property are in question" (article 20 of the Response), as it is precisely with the partition that the heir comes to be considered the sole successor of the property allotted to him in it, in accordance with article 2119 of the Civil Code, and, "Although each heir has had, since the opening of the succession, the right to a proportional part of the inheritance, it is only with the partition that that right is made concrete, making certain and determined the property that will fall to the heir" – see the Decision handed down by the Supreme Court of Administrative Justice (STA) on 28 January 2015, case no. 0450/14, available at http://www.dgsi.pt/.
Nor would it be possible, without identification of the property that fell to the Claimant in each one of the inheritances, of Mother and Father, to correctly allocate the value of the equalizing payments to each one of them, as the TA itself recognizes, "The equalizing payments received by the Claimant necessarily correspond to property (or part of property) that would have fallen to him and which he allotted/alienated to another heir" (article 20 of the Response).
It is true that, in the partition deed, reference is made only to the overall value of the equalizing payments received by the Claimant, without discrimination of the part to be allocated to each hereditary share, but with indication of the property that fell to him (identified as separate property of the Mother, separate property of the Father – which includes cemetery rights, which, not being able to be qualified as real property (but rather as rights of concession of property in the public domain of the municipality), become irrelevant for calculating capital gains income –, and common property).
However, such fact does not authorize the TA to proceed with proportional division of the equalizing payments, when it would be possible to it and, indeed, required, to proceed with their exact allocation to each of the inheritances partitioned.
In fact, it would have been possible for the TA to know, based on the values contained in the partition deed, what the value of the real property was that the Claimant received for composition of his hereditary share in the inheritance of the Mother (separate property – items 18, 19 and 25 and the legitimate share of descendants in his share of item 29) and in the inheritance of the Father (separate property – items 4, 5, 6 and 7, in addition to his share, increased by the legitimate share of the surviving spouse, in item 29) for, by comparison with the value of each hereditary share, to determine the value of the equalizing payments to be taxed, knowing, as is known, that the equalizing payments received for filling the hereditary share from the Mother are excluded from the incidence of tax, by virtue of the transitional rule of article 5, no. 1, of Decree-Law no. 442-A/88, of 30 November, which approved the Personal Income Tax Code.
By dividing proportionally the value of the equalizing payments received by the Claimant, without regard to the hereditary share that he held in each inheritance nor to the real property that he received from each one, what the TA does is create a sort of presumption of the taxable value.
But a presumption is nothing more than an inference "that the law or the judge draws from a known fact to establish an unknown fact" (article 359 of the Civil Code). Now, it being possible for the TA, by simple subtraction of the value of the property that fell to the Claimant in each one of the inheritances partitioned from the value of the share that he held in each one of them, to calculate the exact value of the taxable equalizing payments, it could not create such a presumption, all the more so as the presumption of income, save in exceptional cases provided for in law, is not compatible with the principle of taxation on real income.
Therefore, it should be established that the error of the TA in calculating the realization value considered in the calculation of the capital gains income on which the additional IRS assessment for the year 2011, which is the subject of these proceedings, was based, has been demonstrated.
3.3. On the error in the determination of the acquisition value:
The gain subject to capital gains from onerous alienation of real rights over real property is given by the difference between the realization value and the acquisition value (article 10, no. 4, paragraph a), of the Personal Income Tax Code), and the value of taxable income is that corresponding to half of the positive balance between capital gains and capital losses realized in the same year (article 43, nos. 1 and 2, of the same Code).
To calculate the said balance or difference, it will be necessary to know in advance both the realization value and the acquisition value of the transferred rights.
Article 45, no. 1 of the Personal Income Tax Code provides that the acquisition value on a gratuitous basis is that which was considered for purposes of stamp duty assessment (paragraph a)) or that which would serve as the basis for such assessment, if stamp duty were due (paragraph b)). This acquisition value is corrected by application of the monetary adjustment coefficient referred to in no. 1 of article 50 of the Code cited, as appropriate, taking into account the acquisition date as it appears in the acquisition document (no. 2, preamble).
In the case under analysis, at the date of the opening of the succession of the Claimant's Father, the only date relevant for calculating the capital gains in question, the Personal Income Tax Code was in force, with the Tax Code for Municipal Surtax and Inheritance Tax and Gifts, such that transfers mortis causa were subject to this latter tax, replaced by Stamp Duty in gratuitous transfers (amendments introduced to the Stamp Duty Code by Decree-Law no. 287/2003, of 12 November (reform of taxation on assets).
Thus, the value to be considered as acquisition value will be that which served as the basis for the Inheritance Tax assessment, as has been commonly accepted.
The TA expressly admits not having taken into account the actual acquisition value of the real rights over real property transferred by the Claimant in the partition deed, through receipt of equalizing payments. Claiming ignorance thereof, it admits to having fictioned the minimum value accepted by the IRS assessment computer system, of € 0.01.
The TA justifies its fiction by the fact that the Claimant, to whom would fall the burden of proving the acquisition value, did not proceed with submission of the substitute return regarding income for the year 2011, despite being notified to do so. And that, only long after the deadline for notification had passed did he submit a petition to which he attached a copy of the Inheritance Tax assessment upon the death of his Father.
Now let us examine this: it is an established fact that the Claimants submitted the Model 3 IRS return on time for income in the year 2011, in which they did not include schedules G and G1 referring to the equalizing payments received in the partition of the real property that comprised the inheritances of the Mother and Father of the Claimant, in accordance with the partition deed executed on 4 November of that year.
Such omission would authorize the TA to correct the values declared, pursuant to article 65, nos. 4 and 5 and article 76, no. 1, paragraph a), both of the Personal Income Tax Code.
Despite the notification sent to the Claimant, no substitute return with schedules G and G1 was submitted within the deadline of the notification, which gave rise to the issuance of the additional IRS assessment for the year 2011, now contested.
However, it remains to be determined whether said assessment was made based on the elements in the possession of the TA or, in other words, whether, given the declarative omission, the corrections made to the income declared by the Claimants for the year 2011 could have been of a different nature, particularly those relating to the calculation of the acquisition value of the portion of the hereditary share for which the Claimant received equalizing payments generating capital gains income.
One of the principles governing the activity of the TA is the inquisitorial principle, with legal endorsement in article 58 of the LGT, according to which "The tax administration must, in the procedure, perform all diligences necessary to satisfy the public interest and to discover the material truth, and is not subordinate to the initiative of the petitioner.".
Now, the fact that the (official) assessment procedure was initiated by the TA and that there was no cooperation by the taxpayer within the deadline of the notification, did not exempt the TA from performing all diligences necessary to determine the material truth, in pursuit of the public interest in the legality of the assessment, even if with a result unfavorable to the intention to collect revenue, as determined by the principle of impartiality.
Moreover, even if outside the deadline for prior hearing, the TA should always have taken into consideration the documents attached to the Claimant's petition of 22 June 2015 (a date well before the issuance of the contested assessment), in particular the copy of the Inheritance Tax assessment on his Father's inheritance.
This is an assessment made by the TA and in its possession, easily locatable by the date and address of the Author of the inheritance, identified in the partition deed (the competence for the Inheritance Tax assessment was that of the Tax Department of the municipality or district of the domicile of the deceased at the time of death, pursuant to article 59 of the respective Code) and nothing prevents "(…) outside the scope of prior hearing, interested parties [are able to] make submissions, bring documents and other elements, at any time prior to the final decision, under the principles of discovery of material truth and inquisitorial procedure (…)"[1]
The TA is not correct in stating that "It was the responsibility of the Claimant to indicate and demonstrate the acquisition values – which he did not do on time", as this is not a question of proof, but rather of an inquisitorial power-duty that rests upon it and precedes the rules on burden of proof, which should be understood "in a subsidiary or supplementary sense, applying only when the inquisitorial principle appears to be insufficient"[2]
Having the TA fictioned the acquisition value, in disregard of the actual value, by failure to perform the necessary diligences for its determination and disregard of the documents presented by the Claimant on a date prior to that of the assessment, it is concluded that the error in determining that value is solely attributable to it.
3.4. On the error in the calculation of capital gains income:
Concluding that there was error in the determination of both the realization value and the acquisition value on which the calculation of the capital gains income that was the basis of the contested additional assessment was based, the conclusion that is necessary is that this constitutes a tax act that is illegal, due to violation of the body of legality that governs the determination of that type of income.
4. On the request for indemnificatory interest
The tax arbitral process was conceived as an alternative means to judicial challenge (see the legislative authorization granted to the Government by article 124, no. 2 (first part) of Law no. 3-B/2010, of 28 April – State Budget Law for 2010), and it should be understood that included in the jurisdiction of arbitral tribunals operating under the aegis of CAAD are the powers that, in judicial challenge, are attributed to tax courts, such as that of examining error attributable to the services.
On the other hand, in light of the provision in paragraph b) of no. 1 of article 24 of the RJAT, the TA is bound, in the precise terms of the success of the arbitral decision in favor of the taxpayer and until the expiration of the deadline provided for voluntary compliance with sentences of tax judicial tribunals, to "restore the situation that would exist if the tax act that is the subject of the arbitral decision had not been carried out, adopting the necessary acts and operations for that purpose", which includes "payment of interest, regardless of its nature, in accordance with the terms provided in the General Tax Law and the Code of Tax Procedures and Process.".
Similarly, article 100 of the LGT, applicable to the tax arbitral process by virtue of the provision in paragraph a) of no. 1 of article 29 of the RJAT, establishes that "The tax administration is obligated, in case of total or partial success of complaints or administrative appeals, or of judicial proceedings in favor of the taxpayer, to immediately and fully restore the situation that would exist if the illegality had not been committed, including payment of indemnificatory interest, in accordance with the terms and conditions provided for in law.".
Article 43, no. 1, of the LGT provides that "Indemnificatory interest is due when it is determined, in a complaint or judicial challenge, that there was error attributable to the services resulting in payment of the tax debt in an amount exceeding that legally due.".
Errors are attributable to the TA whether they are errors regarding factual circumstances, which occur whenever there is "a divergence between reality and the factual circumstances used as premises in the performance of the act"[3], or errors regarding legal circumstances, when "in the performance of the act there has been incorrect interpretation or application of legal rules, such as the rules of objective and subjective incidence (…)"[4] and "[they] are established when a complaint or judicial challenge of that same assessment is filed and the error is not attributable to the taxpayer"[5].
In the case at hand, it appears clear that, once declared the illegality of the additional IRS assessment for the year 2011 (and also the accessory assessment of compensatory interest), as there has been demonstrated error in the determination of the capital gains income that gave rise to it, which justifies its annulment, recognition must be accorded to the right of the Claimants to indemnificatory interest on the amount wrongfully paid, from the date of such payment, as established in no. 5 of article 61 of the CPPT, as such illegality is solely attributable to the Tax Administration.
Questions regarding which knowledge is prejudiced
In the decision, the judge must rule on all questions that he must address, refraining from ruling on questions regarding which he must not know (final part of no. 1 of article 125 of the CPPT). The questions to be addressed by the tribunal are, in accordance with no. 2 of article 608 of the Civil Procedure Code (CPC), applicable subsidiarily to the tax arbitral process, by virtue of article 29, no. 1, paragraph e), of the RJAT, "the questions that the parties have submitted for its review, excepting those whose decision is prejudiced by the solution given to others (…)".
In light of the solution given to the questions relating to the determination of capital gains income and payment of indemnificatory interest, knowledge of the invoked defect of lack of reasoning of the contested act is prejudiced, as in accordance with article 124, nos. 1 and 2, paragraph b), of the CPPT, knowledge was accorded of the defect as to whose success it is believed will ensure the most stable and effective protection of the injured interests.
6. DECISION
Based on the factual and legal grounds set out above and, in accordance with article 2 of the RJAT, decision is rendered as follows, judging as entirely successful the present request for arbitral decision:
6.1. To declare the illegality of the additional IRS assessment for the year 2011 contested, due to error in the determination of the capital gains income on which it was based, ordering its annulment;
6.2. To condemn the TA to refund the amount wrongfully paid by the Claimants, increased by indemnificatory interest, from the date of the wrongful payment until the date of issuance of the respective credit note.
VALUE OF THE CASE
In accordance with article 306, nos. 1 and 2, of the CPC, article 97-A, no. 1, paragraph a), of the CPPT and article 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the case is assigned the value of € 4,404.11 (four thousand, four hundred and four euros and eleven cents).
COSTS
Calculated in accordance with article 4 of the Regulation of Costs in Tax Arbitration Proceedings and Table I attached thereto, in the amount of € 612.00 (six hundred and twelve euros), to be borne by the Tax and Customs Authority.
Lisbon, 26 September 2016.
The Arbitrator,
/Mariana Vargas/
Text prepared by computer, in accordance with no. 5 of article 131 of the CPC, made applicable by reference to paragraph e) of no. 1 of article 29 of Decree-Law 10/2011, of 20 January.
The text of this decision is governed by the Orthographic Agreement of 1990.
[1] Cf. CAMPOS, Diogo Leite de and SOUTELINHO, Susana, "Direito do Procedimento Tributário", Almedina, Coimbra, 2013, p. 138.
[2] Cf. ROCHA, Joaquim Freitas da, "Lições de Procedimento e Processo Tributário", 5th Edition, Coimbra Editora, 2014, p. 125.
[3] SOUSA, Jorge Lopes de "Código de Procedimento e de Processo Tributário – anotado e comentado", II Volume, Áreas Editora, 6th Edition, 2011, p. 115.
[4] Idem, ibidem.
[5] CAMPOS, Diogo Leite de, RODRIGUES, Benjamim Silva, SOUSA, Jorge Lopes de "Lei Geral Tributária – Anotada e Comentada", Encontro da Escrita, 4th Edition, p. 342.
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