Process: 205/2016-T

Date: November 25, 2016

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 205/2016-T) addresses a taxpayer's challenge to IRS (Personal Income Tax) assessments for 2011 and 2012 following the rejection of a review request under Article 78 of the Portuguese General Tax Law (LGT). The taxpayer had previously been recognized with 80% temporary disability from 2005-2010, benefiting from tax deductions under Article 87 of the IRS Code. After re-evaluation in 2010, the disability degree was reduced to 51%, below the 60% threshold required for tax-relevant disability status. Consequently, the taxpayer declared no disability in 2011-2012 returns and received reduced refunds. In February 2015, the taxpayer requested official review under Article 78(4) LGT, arguing grave or notorious injustice based on AT Circular Letter 20162/2012, which suggested that in re-evaluations resulting in lower disability degrees, the more favorable degree should be maintained if related to the same clinical pathology. The Tax Authority rejected the review on December 21, 2015, concluding the requirements of Article 78(4) were not met, specifically finding the assessment error was attributable to the taxpayer's own conduct in not declaring disability status. The taxpayer then initiated CAAD arbitral proceedings on April 1, 2016, challenging the IRS assessments for 2011 and 2012. The arbitral tribunal was constituted on June 20, 2016, and confirmed its material competence under Article 2(1)(a) of the Arbitration Regime in Tax Matters (RJAT). The case illustrates the procedural pathway for challenging tax assessments: initial review request under Article 78 LGT, followed by arbitral proceedings at CAAD when the administrative review is denied. The decision demonstrates how disability status changes impact IRS deductions and the strict requirements for proving grave injustice in tax assessment challenges.

Full Decision

ARBITRAL DECISION

I. Report

1. A…, taxpayer no. …, resident at Av.ª …, …, …, …, …-… Braga, requested the constitution of an arbitral tribunal in tax matters, raising a request for arbitral pronouncement against the acts of assessment of Personal Income Tax (IRS) relating to the years 2011 and 2012, to which refers the decision to reject a request for review filed under article 78 of the General Tax Law (LGT), delivered on 21-12-2015 on information no. …/15, of the Income Tax Service Directorate.

2. As the basis for the request, submitted on 01-04-2016, the Applicant alleges, in summary, disagreement with the said decision, on the grounds that, with reference to the said assessment acts, the requirements for the requested review are met, namely, the existence of grave or notorious injustice to which articles 4 and 5 of that provision refer.

3. In response, the Tax and Customs Authority (AT) pronounced itself in the sense of the inadmissibility of the present request for arbitral pronouncement, as it does not meet, according to the reasons stated in the impugned decision, the legal conditions for its consideration, with the impugned acts remaining in the legal order and, in accordance with this, the absolution of the Respondent entity.

4. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 08-04-2016.

5. Pursuant to the provisions of article 6, no. 2, paragraph a) and article 11, no. 1, paragraph b) of Decree-Law no. 10/2011, of 20 January, with the wording introduced by article 228 of Law no. 66-B/2012, of 31/12, the Deontological Council appointed the undersigned as arbitrator of the single arbitral tribunal, who communicated acceptance of the appointment within the applicable period, and notified the parties of this appointment on 02-06-2016.

6. Duly notified of this appointment, the parties did not manifest willingness to challenge the appointment of the arbitrator, pursuant to the combined provisions of article 11, no. 1, paragraphs a) and b) of the Arbitral Tribunal Regulations (RJAT) and articles 6 and 7 of the Deontological Code.

7. Thus, in accordance with the provisions of article 11, no. 1, paragraph c) of the RJAT, with the wording introduced by article 228 of Law no. 66-B/2012, of 31/12, the single arbitral tribunal was constituted on 20-06-2016.

8. The regularly constituted arbitral tribunal is materially competent, in light of the provisions of article 2, no. 1, paragraph a) of the RJAT.

9. The parties have legal personality and capacity and have standing (articles 4 and 10, no. 2 of the RJAT, and article 1 of Order no. 112-A/2011, of 22/03).

10. The case does not suffer from nullities and no other questions have been raised that prevent the consideration of the merits of the case, with the conditions being met for a final decision to be delivered.

11. Thus, considering the knowledge arising from the procedural documents, particularly the administrative file and documents presented by the Applicant, which is deemed sufficient, the Tribunal, in accordance with what is requested by the Parties, decided to dispense with the meeting referred to in article 18 of the RJAT.

II. Facts

12. With relevance to the consideration of the question raised, the following factual elements are highlighted which, based on the documents that form part of the present case, are considered proven:

12.1. The Applicant, by a multi-purpose medical certificate of incapacity issued by the Northern Regional Health Delegation (DRSN) on 01-08-2006, was recognized as having a degree of temporary incapacity, for 4 years, of 80%, this incapacity situation being reported to the year 2005.

12.2. The degree of incapacity attributed to the Applicant, under Decree-Law no. 202/96, of 23/10, was determined in accordance with the National Table of Incapacities (TNI) approved by Decree-Law no. 341/93, of 30/09, with the respective medical certificate stating that the same was "subject to future evaluations, and should be re-evaluated after 4 years".

12.3. In the income tax returns, Form 3 IRS, relating to the years 2007 to 2010, the Applicant declared a degree of tax-relevant disability of 80%, as recognized under the applicable legislation, which, in the corresponding assessments, allowed him to benefit from the deductions provided for in article 87 of the IRS Code (CIRS).

12.4. After the four years referred to in the multi-purpose certificate issued on 01-08-2006, the Applicant's incapacity was re-evaluated, and he was attributed a global permanent disability of 51%, determined in accordance with the provisions of article 4 of Decree-Law no. 202/96, of 23/10, as amended by Decree-Law no. 291/2009, of 12/10, with the incapacity being calculated in accordance with the National Table of Incapacities for Work Accidents and Occupational Diseases, approved by Decree-Law no. 352/2007, of 23/10.

12.5. Being unable, therefore, to be considered as a person with tax-relevant disability, in accordance with the provisions of article 87, no. 5 of the CIRS, the Applicant, in the income tax returns relating to the years 2011 to 2013 made no mention of any disability.

12.6. From the said returns resulted assessments that determined refunds in the amounts of € 685.84 (2011), € 942.92 (2012) and € 208.71 (2013), the latter being the result of a substitute return duly filed.

12.7. On 10-02-2015 the Applicant, under article 78, no. 4 of the LGT presented a request for official review of the IRS assessments relating to the years 2011, 2012 and 2013, alleging the grave or notorious injustice resulting from taxation "in a manner manifestly disproportionate to his condition".

12.8. The request for review of the said assessments is based on the understanding, disclosed by AT through Circular Letter no. 20162, of 11-05-2012, that "In situations of review or re-evaluation of incapacity, whenever such procedure results in the attribution of a degree of incapacity lower than that previously certified, the other degree, more favorable to the taxpayer, shall be maintained, provided that it relates to the same clinical pathology that determined the attribution of the incapacity in question".

12.9. By order of 21-12-2015, notified to the Applicant on 12-01-2016, the request for official review was rejected on the grounds that, in the case, the requirements for review provided for in article 78, no. 4 of the LGT were not met, specifically the circumstance that the error in the assessment was not attributable to negligent conduct of the taxpayer.

13. There are no facts relevant to the decision on the merits that have not been proven.

III. Law

14. In the request for arbitral pronouncement the Applicant submits to the consideration of this tribunal the legality of the acts of IRS assessment relating to the years 2011 and 2012, excluding, however, from the scope of the present case the assessment relating to the year 2013, covered by the request for review subject to express rejection, on the grounds that the situation to which it relates has been regularized by AT.

15. From the facts given as proven it follows that the Applicant, considered as a bearer of tax-relevant disability for the purposes of benefiting from the deduction referred to in article 87 of the CIRS with reference to the years 2007 to 2010, ceased to be so with respect to the following years, by virtue of the incapacity of which he is a bearer having been re-evaluated in 2010, being then attributed a degree of disability below that provided for in no. 6 of that provision.

16. Consequently, and with reference to income earned in the years 2011 and 2012, to which the assessments under consideration in the present case relate, the Applicant declared no disability, and the corresponding assessments were made in accordance with what was declared, and the deductions to which persons bearing tax-relevant disability are entitled under article 87 of the CIRS were therefore not considered.

17. Finding, however, that, if he had benefited from the said deductions, the IRS amounts to be refunded would have been of a value higher than that resulting from the assessments in question, with the overall difference of € 6,661.45 in his favor, the Applicant, on 10 February 2015, filed a request for official review, invoking article 78, no. 4 of the LGT and, as to the timeliness of the request, the circumstance that it was only in that year that he became aware of the content of circular letter no. 20162, of 11-05-2012.

18. In support of the request for official review, the Applicant states that with respect to the years 2011 and 2012 should be considered, for the purposes of IRS assessment, the degree of incapacity of 80% that had been attributed to him in 2006, calculated in accordance with Decree-Law no. 202/96, of 23/10 and the National Table of Incapacities, approved by Decree-Law no. 341/93, of 30/09, and not the 51% resulting from the re-evaluation carried out in 2010, under the said decree, as amended by Decree-Law no. 291/2009, of 12/10, calculated in accordance with the National Table of Incapacities for Work Accidents and Occupational Diseases, approved by Decree-Law no. 352/2007, of 23/10.

19. The Applicant further alleges that, with respect to the years 2011 and 2012, he made no mention in his income tax returns of the disability of 80% that had been attributed to him in 2006 because he was unaware of the content of circular letter no. 20161, of 11-05-2012, of which he only became aware in late January 2015.

20. The said circular letter discloses AT's understanding with respect to the amendments introduced to Decree-Law no. 202/96 by Decree-Law no. 291/2009, of 12/10, homologated by Order of the Secretary of State for Tax Affairs no. 187/2012-XIX, of 28/03.

21. Regarding the implications of the said decree as concerns the application of the IRS deduction scheme which benefits persons bearing disability, article no. 3 of the said circular letter states that:

"3 - In situations of review or re-evaluation of incapacity, whenever such procedure results in the attribution of a degree of incapacity lower than that previously certified, the other degree, more favorable to the taxpayer, shall be maintained, provided that it relates to the same clinical pathology that determined the attribution of the incapacity in question.

22. It is, therefore, on the basis of this understanding that the Applicant requested the official review of the IRS assessments relating to the years 2011 and 2012, so that the same be made taking into account the degree of incapacity of 80% that had been attributed to him in 2006 and, consequently, taking into account the deductions provided for in article 87 of the respective Code.

23. Considering that the rule of article 78, no. 4, on which the request for review presented is based, presupposes, in addition to the recognition of grave or notorious injustice in taxation, that "the error is not attributable to negligent conduct of the taxpayer", the request was rejected, following prior hearing, by order of 21-12-2015.

24. As the Applicant rightly points out, the competent entity decided to reject the request with "the SOLE argument that there had been negligence on the part of the Applicant in not being aware of the aforementioned circular letter".

25. According to the said decision, the circumstance that the taxpayer filed the request for official review of the assessments on 10-02-2015, approximately three years after the disclosure of the circular letter invoked as the basis of the request, constitutes an indication of negligence, which excludes the possibility of the requested review.

26. In effect, article 78, no. 4 of the LGT, as worded by Law no. 60-A/2005, of 30/12, establishes an exceptional review regime whenever taxation presents grave or notorious injustice, "provided that the error is not attributable to negligent conduct of the taxpayer".

27. In the situation under consideration, it is found that the understanding conveyed through circular letter no. 20161, of 11-05-2012, the untimely lack of knowledge of which is invoked by the Applicant as the basis of the request for review of the IRS assessments of the years 2011 and 2012, is that which results from the provisions of article 4, nos. 7 to 9 of Decree-Law no. 202/96, of 23/10, as amended by Decree-Law no. 291/2009, of 12/10, the wording of which is as follows:

"7 - Without prejudice to the provisions of no. 1, in review or re-evaluation procedures, the degree of incapacity resulting from the application of the National Table of Incapacities for Work Accidents and Occupational Diseases in force at the date of evaluation or of the last re-evaluation shall be maintained whenever, according to the declaration of the medical board, it proves more favorable to the evaluated person.

8 - For the purposes of the preceding number, the degree of incapacity is considered unfavorable to the evaluated person when the change in the degree of incapacity resulting from review or re-evaluation implies the loss of rights which the same is already exercising or of benefits which have already been recognized to him.

9 - In the review or re-evaluation procedure, the degree of incapacity resulting from the application of the national table of incapacities for work accidents and occupational diseases shall be maintained unchanged whenever it results in a degree of incapacity lower than the degree determined at the date of evaluation or of the last re-evaluation."

28. According to the impugned decision, the taxpayer could, therefore, considering the date of issuance of the circular letter which he invokes, have filed a substitute return in place of that which he had filed relating to income earned in 2011 and that relating to 2012, making mention of the degree of disability that had been attributed to him in 2006, had he deemed himself covered by the provisions transcribed above.

29. Agreeing with the said decision, it is concluded, therefore, that the mere allegation of ignorance of the administrative guidance established with reference to the said legal rules - the ignorance of which could not be alleged, as, moreover, the Applicant does not fail to recognize - does not constitute proof of absence of his responsibility regarding the impugned assessments.

30. As provided for in article 78, no. 4 of the LGT, the exceptional review regime to which the same refers has as its requirements, in addition to the grave or notorious injustice of the taxation, that the same shall have at its origin an error which is not attributable to negligent conduct of the taxpayer, which, in light of the facts given as proven, is not verified in the present case.

IV. Decision

For these reasons, and on the grounds set out above, the Arbitral Tribunal decides to find the claims filed by the Applicant inadmissible, deciding to maintain in the legal order the assessments of 2011 and 2012, as they do not suffer from any illegality.

Value of the case: € 6,661.45.

Costs: Pursuant to article 22, no. 4 of the RJAT, and in accordance with Table I attached to the Regulations on Costs in Tax Arbitration Proceedings, I fix the amount of costs at € 612.00, to be borne by the Applicant.

Lisbon, 25 November 2016,

The Arbitrator, Álvaro Caneira.

Frequently Asked Questions

Automatically Created

What is a tax reassessment request under Article 78 of the Portuguese General Tax Law (LGT)?
A tax reassessment request under Article 78 of the Portuguese General Tax Law (LGT) is an extraordinary administrative procedure allowing taxpayers to request official review of tax assessments when there is grave or notorious injustice resulting from taxation manifestly disproportionate to the taxpayer's circumstances. Article 78(4) specifically permits review of assessment acts when errors exist that are not attributable to negligent conduct by the taxpayer. This procedure is initiated directly with the Tax Authority before resorting to judicial or arbitral remedies. The request must demonstrate that the assessment contains errors leading to manifest injustice, and crucially, the taxpayer must prove they did not contribute to the error through their own negligence or omissions in declaring relevant facts.
What are the requirements for proving grave or notorious injustice in IRS tax liquidation disputes?
To prove grave or notorious injustice in IRS tax liquidation disputes under Article 78 LGT, taxpayers must establish several requirements: (1) the existence of an error in the tax assessment that produces manifestly unjust results; (2) the error resulted in taxation disproportionate to the taxpayer's actual circumstances or legal position; (3) the error was not caused by the taxpayer's negligent conduct, omissions, or failure to declare relevant information; and (4) the injustice is sufficiently serious to warrant extraordinary review outside normal challenge procedures. References to Articles 4 and 5 of Article 78 indicate the need to demonstrate clear legal or factual errors. In disability-related IRS cases, this involves showing the assessment failed to apply applicable deductions correctly through no fault of the taxpayer's own declarations or conduct.
Can taxpayers challenge IRS income tax assessments through CAAD arbitral proceedings?
Yes, taxpayers can challenge IRS income tax assessments through CAAD (Centro de Arbitragem Administrativa) arbitral proceedings. Article 2(1)(a) of the Arbitration Regime in Tax Matters (RJAT - Regime Jurídico da Arbitragem Tributária) establishes CAAD's material competence to hear disputes involving tax assessment acts, including IRS liquidations. The arbitral process begins with submitting a request for constitution of an arbitral tribunal, which is automatically notified to the Tax Authority. An arbitrator is appointed by CAAD's Deontological Council, and parties have the right to challenge the appointment. Once constituted, the arbitral tribunal examines the legality of the contested IRS assessments based on administrative files and party submissions. CAAD arbitration provides an alternative to judicial courts for resolving tax disputes, typically offering faster resolution timelines.
What happens when the Tax Authority (AT) rejects a revision request for IRS liquidation acts?
When the Tax Authority (AT) rejects a revision request for IRS liquidation acts under Article 78 LGT, taxpayers have the right to challenge this rejection decision through arbitral or judicial proceedings. The rejection decision itself becomes an administrative act subject to challenge. Taxpayers can file a request for arbitral pronouncement at CAAD within the applicable deadline (typically within the limitation periods for challenging administrative acts). The arbitral tribunal will then review both the legality of the original IRS assessments and the grounds for AT's rejection of the review request. The contested assessments remain in the legal order unless successfully challenged. If the tribunal finds the rejection was improper and the requirements for Article 78 review were met, it can order the assessments to be revised or annulled.
How does the CAAD arbitral tribunal process work for personal income tax (IRS) disputes in Portugal?
The CAAD arbitral tribunal process for IRS disputes follows these stages: (1) The taxpayer submits a request for constitution of an arbitral tribunal, which CAAD's President accepts or rejects; (2) AT is automatically notified and submits its response; (3) CAAD's Deontological Council appoints an arbitrator (or three-arbitrator panel); (4) Parties are notified and may challenge the appointment; (5) The tribunal is formally constituted after the challenge period expires; (6) Parties may present additional evidence and arguments; (7) The tribunal may hold hearings or dispense with them if the written record is sufficient; (8) The tribunal issues a binding arbitral decision on the merits, examining the legality of the tax assessments based on applicable law. The entire process typically concludes within several months, offering faster resolution than traditional judicial courts.