Process: 205/2015-T

Date: November 10, 2015

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitration case (205/2015-T) concerned the exclusion of compensatory interest (juros indemnizatórios) from a 2012 Corporate Income Tax (IRC) assessment. The taxpayer, A..., S.A., challenged IRC assessment no. 2014... dated June 5, 2014, and the corresponding account adjustment, arguing the Tax Authority (AT) improperly removed €17,407.36 in default interest from the calculation without providing adequate legal justification. The company contended this constituted a lack of reasoning violating constitutional and procedural requirements under Article 268(3) of the Portuguese Constitution and related tax procedural codes. The taxpayer argued that when a Model 22 income statement is submitted within the legal deadline without filling errors, the AT must process refunds within three months, and failure to do so triggers compensatory interest obligations under Article 104(3) and (6) of the IRC Code. Although the taxpayer later filed a replacement Model 22 correcting autonomous taxation on vehicle expenses, it maintained the original filing contained no error justifying denial of interest. The Tax Authority raised a preliminary exception challenging the tribunal's material jurisdiction, arguing the claim essentially sought recognition and payment of compensatory interest rather than challenging a tax act's legality—matters allegedly outside RJAT's scope. The tribunal dismissed this exception, ruling that the case properly involved examining the legality of a tax assessment act, which falls squarely within tax arbitration competence under Article 2(1)(a) of Decree-Law 10/2011. The tribunal clarified the claimant sought annulment of the tax act, not mere recognition of interest rights, and any resulting restitution would be a consequence of that annulment rather than an independent claim. The tribunal confirmed its competence, proper constitution, and the parties' legal standing to proceed with examining the substantive merits.

Full Decision

ARBITRAL DECISION

CAAD: Tax Arbitration

Case No. 205/2015-T

Claimant: A…, S.A

Respondent: Tax and Customs Authority

Arbitrator Dr. André Festas da Silva, appointed by the Ethics Council of the Administrative Arbitration Centre (CAAD) to form the Arbitral Tribunal, constituted on 2 June 2015, decides as follows.

I. REPORT

I.1

  1. On 20 March 2015, A…, S.A., a company with registered office at Avenue …, no. …, in Lisbon (…), with unique registration number and collective person number …, requested, under the terms and for the purposes set forth in article 2(1)(a) and article 10, both of Decree-Law No. 10/2011, of 20 January, the constitution of an Arbitral Tribunal with appointment of the sole arbitrator by the Ethics Council of the Administrative Arbitration Centre, pursuant to the provisions of article 6(1) of the aforementioned decree-law.

  2. The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and was notified to the Tax and Customs Authority (hereinafter referred to as AT or "Respondent") on 23 March 2015.

  3. The Claimant did not proceed with the appointment of an arbitrator, so, under the provisions of article 5(2)(b) and article 6(1) of the RJAT, the signatory was appointed by the President of the Ethics Council of CAAD to compose the present sole Arbitral Tribunal, having accepted under the legally provided terms.

  4. The AT presented its response on 6 July 2015.

  5. On 8 September 2015, the Claimant responded to the exception raised by the AT.

  6. By order of 09.09.2015, the holding of the meeting provided for in article 18 of the RJAT was dispensed with, and it was decided that the proceedings should continue with written submissions.

  7. On 18 September 2015, the Claimant presented its legal submissions.

  8. On 2 October 2015, the Claimant presented its legal submissions.

  9. The Claimant seeks for the Arbitral Tribunal to declare the illegality of the Corporate Income Tax (IRC) assessment No. 2014 …, of 05.06.2014 and the statement of account adjustment No. 2014 …, of 11.06.2014, concerning the tax year 2012.

I.A. The Claimant supports its request, in summary, as follows:

  1. The tax administration demands payment of the amount of €17,407.36, removing from the calculation for the tax year the amount of default interest previously paid, without presenting any grounds for such disregard.

  2. Thus the act suffers from lack of reasoning (article 268(3) of the CRP, articles 36 and 99(c) of the CPPT, article 77(2) of the LGT, article 62 of the RCPIT and article 125 of the CPA).

  3. When the Model 22 income statement is submitted within the legal deadline and does not contain "filling errors", the tax administration must effect the refund to the taxpayer by the end of the third month following submission of the statement.

  4. If the tax administration does not effect the refund to the taxpayer within that deadline, default interest is therefore due.

  5. Now, in the present case, there was a delay in processing the refund which, under article 104(3) and (6) of the IRC Code, imposed the obligation to pay default interest.

  6. Although the Claimant presented a replacement Model 22 income statement, the fact is that in the first Model 22 income statement presented, the Claimant did not incur any "filling error" capable of exempting the tax administration from the obligation to refund the tax within the period provided for in article 104(3) of the IRC Code.

  7. Even admitting in the case at hand the existence of a "filling error", which is only conceived for mere caution, without conceding, it must be considered that the refund made after the expiry of that total period of seven months (four + three) always subjects the tax administration to the obligation of payment of default interest.

I.B In its Response, the AT raised the following:

  1. By way of exception, the AT alleged that the request formulated by the Claimant falls outside the material scope of tax arbitration as fashioned by the legislator of the RJAT.

  2. Note that the request formulated by the Claimant is directed at condemning the Tax Administration to recognize and pay the right to default interest.

  3. The recognition of rights in tax matters and the examination of tax issues that do not involve the examination of the legality of an assessment act are not contemplated in the RJAT.

  4. The Claimant presented a Replacement Statement, having corrected the amount relating to vehicle expenses subject to autonomous taxation.

  5. The Claimant altered the tax base of autonomous taxation for the tax year 2012.

  6. By making such alteration, the Claimant directly and necessarily altered the value of autonomous taxation.

  7. Thus, it cannot be disregarded that there was an error in the completion of the Model 22 statement attributable solely to the Claimant.

  8. The error that appeared in the original Income Statement is attributable solely to the Claimant.

  9. Thus, if one of the cumulative conditions set forth in article 104(3) of the IRC Code is not met, there was no obligation to proceed with the refund of IRC within the deadline determined therein.

I.C The Respondent responded to the exception as follows:

  1. The issue to be decided does not reside in the recognition of the right to default interest.

  2. What the Claimant seeks to obtain is the annulment of the tax act, i.e., the removal from the legal order of the tax act in question, and not the recognition of the right to default interest.

  3. The issues upon which the Arbitral Tribunal is called to pronounce itself are limited to the legality of the tax act sub judice.

  4. This conclusion is not prejudiced by the fact that the annulment of the tax act in question has as a consequence the restitution to the Claimant of an amount, by way of default interest, which was disregarded in this tax act, and whose right had already been recognized by the tax administration, because such restitution is a mere consequence of the acceptance of the request formulated in the proceedings.

  5. At no time was the recognition of the right to default interest petitioned.

II. DISMISSAL OF PRELIMINARY ISSUES

An exception of material incompetence of the Arbitral Tribunal is invoked, which must be examined previously.

The Respondent alleges that it is not within the competence of this Tribunal to examine this dispute, as it falls outside the scope of the material competence of arbitration. In the view of the AT, the request formulated by the claimant is directed at condemning the AT to recognize and condemn it to pay default interest.

What is the law?

Analyzing the statement of claim of the claimant, it is found that the request consists solely in the annulment of the tax act in question.

The Claimant did not formulate any request for condemnation of the AT to pay default interest, which results from its statement of claim and is confirmed in its response to the exception, where it is stated: "At no time was the recognition of the right to default interest petitioned."

The Claimant alleges certain defects from which, in its opinion, the tax act (2012 IRC assessment) suffers, which should lead to its annulment.

Thus, as the examination of the tax act is requested and its legality is at issue, such matter is included in the material competence of this arbitration.

In view of the foregoing, under article 2(1)(a) of Decree-Law No. 10/2011 of 20 January, the Tribunal concludes that it is materially competent, and therefore the invoked exception is dismissed.

The Tribunal is competent and is regularly constituted under articles 2(1)(a), 5 and 6, all of the RJAT.

The proceedings are proper.

The parties have legal standing and capacity.

The parties are legitimate and are legally represented under articles 4 and 10 of the RJAT and article 1 of Ministerial Order No. 112-A/2011, of 22 March.

There are no other preliminary issues requiring examination nor defects that would invalidate the proceedings.

It is now necessary, therefore, to examine the merits of the request.

III. ISSUES FOR DETERMINATION

The issues to be examined are as follows:

a) Does the tax act suffer from lack of reasoning?

b) Should the non-inclusion of default interest in the IRC assessment lead to its annulment?

IV. STATEMENT OF FACTS

IV.1. Proven Facts

Before proceeding to examine the issues, it is necessary to present the factual matter relevant to its understanding and resolution, which, having examined the documentary evidence, the attached tax administrative proceedings, and considering the alleged facts, is established as follows:

  1. On 28.05.2013, the Claimant submitted the periodic income statement Model 22 for the tax year 2012, in which it calculated an amount to be refunded of €1,475,456.19.

  2. In that statement, the Claimant reported, as vehicle expenses subject to autonomous taxation under the provisions of article 88(3) and (4) of the IRC Code, the amounts of €558,634.88 and €89,293.36, respectively.

  3. On 20.02.2014, the Claimant was notified of IRC assessment No. 2014 …, of 22.01.2014, relating to that tax year, in which the amount to be refunded is calculated as €1,492,863.57.

  4. The aforementioned assessment reflects, on the one hand, a correction to the autonomous taxation amount declared in the amount of €8,949.58 (corresponding to the difference between the corrected amount of €81,552.30 and the declared amount of €72,602.72) and, on the other hand, the payment of default interest for the delay in processing the refund in the amount of €26,356.94.

  5. Subsequently, on 28.05.2014, the Claimant submitted a replacement Model 22 income statement, relating to the same tax year 2012, in which it calculated the same amount to be refunded of €1,475,456.19, but altering the amounts reported as vehicle expenses subject to autonomous taxation under the provisions of article 88(3) and (4) of the IRC Code to €488,561.06 and €79,582.38, respectively.

  6. The Claimant was notified on 08.07.2014 of the tax act sub judice (assessment No. 2014 …).

  7. In the tax act sub judice (assessment No. 2014 …) issued following the submission of that replacement statement, the tax administration reinstated the amount declared as autonomous taxation in the periodic income statement for the tax year, in the amount of €72,602.72, eliminating the previous correction of €8,949.58.

  8. Nevertheless, it removed from the calculation for that tax year the amount previously paid as default interest, in the amount of €26,356.94.

  9. As a result of these corrections, that tax act demands from the Claimant the payment of an amount of €17,407.36 (corresponding to the difference between the amount of €26,356.94 and €8,949.58).

  10. Not accepting the tax act in question, in September 2014 the Claimant submitted an administrative complaint against it.

  11. On 24.01.2014, the Claimant was notified of the draft decision rejecting the administrative complaint presented.

  12. The tax administration states that, due to the delay occurring in processing the refund of the tax, default interest was granted to the Claimant under article 104(6) of the IRC Code, inasmuch as "(…) although there is indeed an error in the calculation of autonomous taxation due, according to the declared taxable base, this error will not be attributable to the Claimant, precisely because of the validation carried out by the services of the statements submitted by taxpayers, whereby the statement would be considered free of filling errors."

  13. However, the tax administration holds that, with the submission of the replacement Model 22 statement, it became evident that the Claimant made an error in the completion of the first statement and, for that reason, default interest is not due.

  14. Thus, the tax administration concludes that "(…) the default interest previously granted was annulled, because the initial statement is not free of errors."

  15. Having chosen not to exercise the corresponding right to prior hearing, on 26.12.2014, the Claimant was notified of the decision rejecting the administrative complaint, which made the aforementioned draft final.

IV.2. Facts Found Not Proven

There are no facts found not proven, as all facts relevant to the examination of the request were found proven.

IV.3. Reasoning on the Findings of Fact

The facts found proven comprise uncontested matter and are documented in the record.

The facts set forth in numbers 1 to 15 are deemed established by agreement of the parties, by analysis of the administrative proceedings, and by the documents submitted by the Claimant (documents 1 to 8 of the request for constitution of the Arbitral Tribunal).

V. APPLICATION OF LAW TO FACTS

a) Lack of Reasoning

The Claimant alleges that the assessment suffers from lack of reasoning, because in the assessment in question the reason for the non-inclusion of default interest is not indicated. Thus, the Claimant alleges that the assessment violates the provisions of articles 268(3) of the CRP, 36 of the CPPT, 77(2) of the LGT, 124 and 125 of the CPA.

It is important to note that in IRC assessment acts, given their nature as "mass processing", the duty of reasoning is fulfilled by the Tax Administration in a "standardized" and "computerized" manner.

The duty of reasoning may be fulfilled by the Tax Administration in a "standardized" and "computerized" manner, given the nature of "mass processing" of modern tax administration. (See J.L. Saldanha Sanches/João Taborda da Gama, "Hearing-Participation-Reasoning: the co-responsibility of the taxpayer in the tax decision", in Tribute to José Guilherme Xavier de Basto, Coimbra, 2006, pp. 290/297, likewise see Decision of the Supreme Administrative Court of 06-03-2014, case no. 0178/13).

It is important to note that the notified assessment was made in accordance with the taxpayer's statement. In this way, the taxpayer has full knowledge of all the elements that make up the assessment. To this effect, see Decision of the Tax Court of Appeal of the South, case no. 01815/07, of 17.07.2007.

Under article 77(2) of the LGT, the reasoning for tax acts must contain the applicable legal provisions, the qualification and quantification of the tax facts, and the calculations of the taxable matter of the tax. None of these elements is lacking.

It is true that no reference is made to default interest. However, article 77(2) of the LGT does not require that in the assessment, if default interest is due, the value thereof be indicated.

The act that recognizes, or does not recognize, the right to default interest is distinct from the tax act. This distinction arises immediately because the obligation to pay default interest has its foundation in the institute of extracontractual civil liability of the State, aimed at compensating taxpayers for unlawful acts. Although it integrates the tax legal relationship (article 30(1)(e) of the LGT), the nature of this obligation is distinct from the obligation arising from the occurrence of the tax event.

Appealing to the distinction made by the distinguished Professor José Casalta Nabais, tax acts in the strict sense are assessment acts. By contrast, acts in tax matters are the other acts carried out in the context of tax legal relationships, which include the recognition, or non-recognition, of the right to default interest (See Tax Law, 5th Ed., Almedina, p. 383). Default interest are acts in tax matters distinct from tax acts, that is, distinct from the assessment in question.

Therefore: "The realization of the compensation inherent in default interest is the subject of a separate assessment, unlike compensatory interest which is included in the assessment of the tax debt (article 35(3) of the LGT)." Decision of the Supreme Administrative Court of 03.03.2010, case no. 1065/09.

The debt arising from default interest does not form part of the tax debt itself, nor is there a legal obligation for it to be assessed together. To this effect, see Jorge Lopes de Sousa, Annotated CPPT, Áreas Editora, 2011, p. 529.

Therefore, by this reasoning, it does not appear to us that there is a lack of reasoning of the tax act in question (assessment).

Furthermore, as the higher courts have come to understand, the legal and constitutional requirement of reasoning aims, primarily, to enable those interested to know the reasons that led the administrative authority to act, in order to enable them to make a conscious choice between accepting the legality of the act and its contentious challenge. See Decision of the Tax Court of Appeal of the South, 30.10.2012, case no. 03896/10 and Decision of the Supreme Administrative Court, 15.04.2009, case no. 065/09.

To achieve this objective, the reasoning must provide the recipient of the act with the ability to reconstruct the cognitive and evaluative path followed by the authority that carried out the act, so that one can clearly know the reasons why it decided as it decided and not differently.

Thus, outside of special situations in which additional duties of reasoning are required (as, for example, in the situations provided for in articles 77(3) and (4) of the LGT), an act is considered sufficiently reasoned when that objective is achieved.

In the present case, it is clear from the request for arbitral pronouncement that the Claimant understood, in full, the various factual reasons that determined the assessment.

In fact, the divergences existing between the AT and the taxpayer are, as results from the proceedings, questions of law.

Thus, there is no defect of lack of reasoning regarding the assessment, as the AT expressed, in a clear manner, the logical, factual, and legal path that determined the preparation of the assessment in question.

Therefore, this argument raised by the taxpayer is dismissed.

b) The Non-Inclusion of Default Interest in the IRC Assessment

As stated above, the non-inclusion, in itself, of default interest in the assessment in question does not affect its legality. The assessment in question is unrelated to the realization of the compensation inherent in default interest. To this effect, see Decision of the Supreme Administrative Court of 03.03.2010, case no. 1065/09.

Furthermore, its non-inclusion would never lead to the annulment of the assessment. The assessment does not suffer from any defect for not indicating the value of default interest, should it be due. At most, it could lead to the condemnation of the AT to payment of default interest (article 104(6) of the IRC Code, article 43(3) of the LGT and article 61(1)(c) of the CPPT).

However, as the claimant stated in its response to the exceptions, that request was not formulated:

"In fact, what the Claimant seeks to obtain is the annulment of the tax act, i.e., the removal from the legal order of the tax act in question, and not the recognition of the right to default interest."

Had it been formulated, we would necessarily have to first assess whether or not this Tribunal has material competence for that purpose.

Nevertheless, as that request was not formulated, it is important to note that in this contentious proceeding the principle of disposal applies, requiring the parties to delimit the request (article 10(2)(c) of the RJAT).

Thus, there is a quantitative and qualitative limitation of the judge by the request. "(…) the limitation of the judge by the request is a rule of generalized application in our procedural law, in which the parties are given the right to dispose of the object of the proceedings, and there is no justification that exceptions to it are not expressly provided for" (In Tax Code of Procedure and Process annotated and commented, Jorge Lopes de Sousa, Áreas Editora, 6th edition, II volume, annotation 13 to article 125, p. 367).

Therefore, since the request was not formulated, this Tribunal is prevented from examining this issue (right to default interest).

Moreover, the recognition of the right to default interest, in the present case, if it were recognized, would not be a mere consequence of the annulment of the tax act. Rather, in the case sub judice the claimant seeks that the non-consideration of the right to default interest, supposedly recognized upstream, taint the tax act downstream. As no request for recognition of the right to default interest has been formulated, this Tribunal cannot order the annulment of an act based on a supposed defect which cannot be known to this Tribunal, nor is it ex officio.

Now, reiterating the conclusion stated above, the non-inclusion of default interest does not call into question the legality of the tax act. The claimant, in addition to this issue, does not attribute any other defect to the assessment.

As the Claimant did not raise any (separate) request for recognition of the right to default interest, there is no partial error in the form of proceedings in the strict sense, but rather an issue situated within the scope of the viability of the request, namely the question of whether valid grounds were invoked in the initial request in light of the chosen procedural means and the request actually formulated (In a similar sense, mutatis mutandis, see Decisions of the Supreme Administrative Court of 28.03.2012, case no. 1145/11, and of 18.06.2014, case no. 1549/13).

There is no doubt that the request formulated in the proceedings (annulment of the assessment) is appropriate to the procedural means provided for in articles 2(1)(a), 10(1)(a), 15 et seq. of the RJAT. However, the cause of action (non-inclusion of default interest in the assessment) is incapable of producing the intended purpose of the present action (annulment of the assessment).

As this Tribunal cannot examine the claimant's right to default interest (because the taxpayer did not formulate that request) and as the non-inclusion thereof in the assessment constitutes no illegality, we conclude for the dismissal of the request for annulment of the tax act.

VI. DECISION

In view of all that has been stated, it is decided:

a) To dismiss the exception of material incompetence of the Arbitral Tribunal;

b) To dismiss entirely the request for arbitral pronouncement, maintaining the contested assessment.

The value of the proceedings is fixed at €17,406.36 under article 97-A(1)(a) of the CPPT, applicable under article 29(1)(a) of the RJAT and article 3(2) of the Regulation on Costs in Tax Arbitration Proceedings.

The arbitration fee is fixed at €1,224.00, under Table I of the Regulation on Costs in Tax Arbitration Proceedings, to be paid in full by the Claimant, as the request was entirely dismissed, under articles 12(2) and 22(4), both of the RJAT, and article 4(4) of the aforementioned Regulation.

Notice is to be given.

Lisbon, 10 November 2015

André Festas da Silva

Frequently Asked Questions

Automatically Created

What happens when compensatory interest (juros indemnizatórios) is excluded from an IRC tax assessment in Portugal?
When compensatory interest is excluded from an IRC tax assessment in Portugal, the taxpayer may challenge this exclusion through administrative or judicial review, including CAAD arbitration proceedings. The exclusion must be properly justified by the Tax Authority; otherwise, it may constitute a violation of the duty to provide reasoning required under Article 268(3) of the Portuguese Constitution and tax procedural law. If the Tax Authority fails to process a refund within the statutory three-month period following submission of a Model 22 return without filing errors, compensatory interest becomes due under Article 104(3) and (6) of the IRC Code. The taxpayer can seek annulment of the assessment act that improperly excluded these interest amounts, and upon successful challenge, the taxpayer would be entitled to restitution of the excluded amounts as a consequence of the annulment.
Can a taxpayer challenge an IRC liquidation that lacks proper legal justification under Portuguese tax law?
Yes, a taxpayer can challenge an IRC liquidation lacking proper legal justification under Portuguese tax law through various mechanisms, including CAAD tax arbitration under Decree-Law 10/2011. The challenge falls within the material competence of tax arbitration when it concerns the legality of a tax assessment act. The lack of adequate legal reasoning (falta de fundamentação) violates constitutional guarantees under Article 268(3) of the Portuguese Constitution, which requires all administrative acts to be reasoned, as well as statutory provisions in Articles 77(2) of the Tax General Law (LGT), Article 36 and 99(c) of the Tax Procedure Code (CPPT), and related provisions. The taxpayer must demonstrate that the assessment act fails to provide sufficient justification for the tax authority's decisions, particularly when excluding amounts or making determinations that affect the taxpayer's rights.
What are the grounds for claiming lack of reasoning (falta de fundamentação) in a Portuguese tax assessment?
The grounds for claiming lack of reasoning (falta de fundamentação) in a Portuguese tax assessment include: (1) failure to comply with Article 268(3) of the Portuguese Constitution, which mandates that all administrative acts affecting citizens' rights must be expressly and adequately reasoned; (2) violation of Article 77(2) of the Tax General Law (LGT), which requires tax acts to be grounded in law; (3) breach of Articles 36 and 99(c) of the Tax Procedure Code (CPPT); (4) non-compliance with Article 125 of the Administrative Procedure Code (CPA). The reasoning defect occurs when the tax authority fails to explain the factual and legal basis for its determinations, such as when removing amounts from calculations without justification, making arbitrary adjustments, or failing to articulate why specific legal provisions apply or do not apply to the taxpayer's situation. This defect renders the administrative act illegal and subject to annulment.
How does the CAAD arbitration process work for disputes over IRC corporate tax assessments?
The CAAD (Centro de Arbitragem Administrativa) arbitration process for IRC corporate tax disputes operates under Decree-Law 10/2011 of January 20. Taxpayers may request constitution of an Arbitral Tribunal under Article 2(1)(a) and Article 10 of the RJAT to challenge tax assessments. The process includes: (1) filing a request for arbitration accepted by the CAAD President; (2) notification to the Tax Authority; (3) appointment of arbitrator(s)—either by the parties or by the CAAD Ethics Council if parties do not appoint; (4) the Tax Authority presents its response; (5) the claimant may respond to any exceptions raised; (6) parties submit written legal arguments; (7) the tribunal may dispense with hearings if appropriate for written submissions; (8) the tribunal examines preliminary issues (such as jurisdiction and standing) before addressing substantive merits; (9) the tribunal issues a binding arbitral decision. The tribunal has material competence to examine the legality of tax acts, including IRC assessments, and parties must have legal standing and proper representation.
What obligations does the Portuguese Tax Authority have when processing Model 22 tax returns submitted within the legal deadline?
When processing Model 22 tax returns submitted within the legal deadline, the Portuguese Tax Authority has the following obligations under Article 104(3) of the IRC Code: (1) effect any tax refund to the taxpayer by the end of the third month following submission of the income statement; (2) this obligation applies when the statement is timely filed and does not contain 'filling errors' (erros de preenchimento); (3) if the AT fails to process the refund within this three-month deadline, it becomes obligated to pay compensatory interest (juros indemnizatórios) to the taxpayer under Article 104(6) of the IRC Code; (4) the AT must provide proper legal reasoning for any delays, adjustments, or exclusions from calculations; (5) even if a replacement statement is subsequently filed, if the original statement contained no filling errors attributable to the taxpayer, the AT's delay in processing the refund triggers the interest obligation. These obligations reflect the principle that administrative efficiency requirements and taxpayer protection must be balanced in tax administration.