CAAD Decision 210/2015-T: IRS Taxation of Per Diem Allowances Under Article 2(3)(d) CIRS

ARBITRAL DECISION

CAAD: Tax Arbitration

Case No. 210/2015-T

Subject Matter: Personal Income Tax (IRS), cost allowances, paragraph d) of Article 2, No. 3 of the Personal Income Tax Code (CIRS)

PARTIES

Claimant – A…, Tax ID …, resident at …, lot … – …

Respondent - Tax and Customs Authority (AT).

I. REPORT

a) On 23-03-2015, the Claimant filed with CAAD a request seeking, under the Legal Regime for Tax Arbitration (RJAT), the establishment of a singular arbitral tribunal (SAT).

b) The request is signed by a lawyer representing the Claimant.

THE REQUEST

c) The Claimant requests the annulment of an official Personal Income Tax assessment for the year 2010, numbered 2014… (according to AT's response) and numbered … dated 21-11-2014 (according to the arbitration petition) generating a tax collection of 4,649.92 euros and default interest of 1,041.93 euros, totaling 5,691.75 euros.

d) He alleges its non-conformity with law on the ground that AT considered amounts he received in the year 2010 as employment income rather than as cost allowances as he characterized them. He further petitions, consequently, that the assessment of default interest be considered annulled.

REGARDING THE SINGULAR ARBITRAL TRIBUNAL (SAT)

e) The request for establishment of the SAT was accepted by the President of CAAD and automatically notified to AT on 25.03.2015.

f) By CAAD's Ethics Council, the undersigned was appointed as arbitrator, with the parties being notified thereof on 23.04.2015. The parties manifested no intent to refuse the appointment, pursuant to the combined provisions of Article 11, No. 1, paragraphs a) and b) of the RJAT and Articles 6 and 7 of the Code of Ethics.

g) Wherefore the Singular Arbitral Tribunal (SAT) has been, since 02.06.2015, properly constituted to examine and decide the subject matter of this dispute (Articles 2, No. 1, paragraph a) and 30, No. 1, of the RJAT).

h) All such acts are documented in the notification of constitution of the Singular Arbitral Tribunal dated 02.06.2015, which is hereby reproduced herein.

i) On 02.06.2015 AT was notified in accordance with and for the purposes of Article 17-1 of the RJAT. It responded on 02.07.2015, enclosing the Administrative File (PA).

j) The Claimant waived the examination of two witnesses listed in the arbitration petition. Both parties waived the holding of the meeting of the parties referred to in Article 18 of the RJAT but not the submission of written arguments.

k) By order of 16.07.2015 the SAT set the deadline for submission of written arguments and successive arguments.

l) The Claimant submitted arguments on 14.09.2015 and the Respondent on 23.09.2015.

PROCEDURAL REQUIREMENTS

m) Standing, capacity and representation - The parties have legal personality, procedural capacity, proper standing and are represented (Articles 4 and 10, No. 2, of the RJAT and Article 1 of Ministerial Order No. 112-A/2011, of 22 March).

n) Right to be heard - AT was notified in accordance with subsection i) above. All procedural documents and all documents attached to the case were made available to the opposing party in CAAD's Case Management System.

o) Dilatory exceptions - The arbitration procedure is free of defects and the arbitration petition is timely since it was filed within the period prescribed in paragraph a) of Article 10, No. 1 of the RJAT. Indeed:

The Claimant alleged in the preamble of the petition "knowledge of the existence in his name of an official assessment" attaching as proof a "printout" of a Personal Income Tax assessment consultation dated 10.03.2015. He explains that he became aware of the Personal Income Tax assessment through summons for enforcement proceedings. AT did not question this factual basis. There being no element in the case that would permit concluding that the filing of the arbitration petition with CAAD on 23-03-2015 was untimely, the SAT considers this procedural requirement satisfied.

SUMMARY OF THE CLAIMANT'S POSITION

p) The Claimant, resident in Lisbon, alleges that he is a dependent worker of B… Branch in Portugal, with establishment in ..., a company whose activity consists in carrying out works on soil in maritime and coastal areas (coastal defense, beach sand reinforcement, dredging of river beds and sea bottoms),

q) He alleges that he exercises functions which require "frequently displacement and stay at construction work sites of his employer, both in Portugal and abroad", receiving a salary of 800.00 euros per month to which cost allowances are added.

r) To reimburse him "approximately" for the food and accommodation expenses that such displacements entail, B… grants him, as is company policy, certain amounts by way of cost allowances.

s) In the year 2010 such allocation was 1,633.00 euros in 14 payments, totaling 22,862.00 euros during the year.

t) He provided AT with the payslips (which express the above-referred) and a document containing the locations where he was displaced during the year 2010 (containing the month, the location of the work, the country, the work number and the days he was displaced there).

u) He protests against AT's non-acceptance of the amounts referred to in s) as cost allowances, alleging that all legal requirements are met for that allocation to be considered as "approximate reimbursement" of the expenses he incurred.

v) On the basis that the amounts earned fell short of the maximum limit of non-taxable cost allowances, corresponding to 56% of the maximum admissible.

w) He alleges that this system of allocation of cost allowances adopted by his employer (a fixed amount paid in 14 equal monthly installments) aims at documentary simplicity by removing that burden from workers, in view of their tasks, since they work at construction sites.

x) He expresses that this mechanism of allocation of cost allowances (by approximate amount) is aimed at "…creating normalization mechanisms tending to reduce the number of variables with which salary processing has to deal" and adds "Only in this way can the claimant, at all times, have available the necessary funds to survive when suddenly and abruptly displaced to such diverse locations as those where his employer's works are situated"

y) He concludes: "That… patrimonial advantage should be subject to Personal Income Tax and Social Security contributions, always in compliance with the aforementioned principle of material justice, or the primacy of substance over form" when "the amounts allocated exceed the reimbursement necessary for displaced workers to meet food and transport expenses, with such excess measured by exceeding the legal limits of cost allowances".

z) In his arguments he sustained this understanding and regarding the burden of proof he states that AT "should further prove that the amounts earned by the worker deployed in service do not have a compensatory or reimbursement nature, but rather a situation of enrichment of the worker".

SUMMARY OF THE RESPONDENT'S POSITION

aa) AT expresses that the "evidence produced and contained in the administrative proceedings unequivocally demonstrates that that amount of €1,633.00, which is paid 14 times per year, and always in the exact same value, does not correspond to the payment of cost allowances (according to the claimant … for "food and accommodation expenses"), for purposes of its tax deduction, since the legal requirements allowing its consideration as cost allowances are not met".

bb) It contends that "neither the claimant nor the employer complied" with "… the 2nd part of paragraph d) of Article 2, No. 3 of the CIRS (…) the following are considered employment income (…) cost allowances (…) when the requirements for their allocation to civil servants are not observed and amounts for displacement, travel or representation expenses for which no accounting has been rendered by the end of the fiscal year."

cc) It considers the document referred to in the final part of subsection t) above "… addresses only the charges deductible for tax purposes under Corporate Income Tax law, and not the subject matter of this case" and "such document permits no assessment, because it proves incomprehensible: i. Numbers of days of work/displacements monthly different, always produce the same monthly remuneration; ii. Displacements either in Portugal or Spain, likewise always produce the same monthly remuneration; iii. The months of July and November are paid double, like the base remuneration".

dd) And concludes: "What effectively results clear and unequivocal is that the remuneration in question is not mathematically dependent on the days of work displaced away from his habitual location".

ee) It further refers: "… both civil servants and companies are obliged to comply with requirements of a formal nature, particularly of a documentary nature. In both, the records must permit control of the amounts paid. Such records, in addition to aiming at internal control, as the claimant refers, equally aim to verify compliance with the requirements that determine, or not its taxation".

ff) Specifically it alleges the following regarding the document referred to in the final part of t) above: "… the record in question does not even permit assessment of the daily value paid by way of the supposed cost allowance, nor does it permit understanding whether the value is the same when the displacement is made outside Portugal or within Portugal, which is always essential to assess whether they exceed, or do not exceed the limits from which there is taxation of the excess" – 2nd part of paragraph d) of Article 2, No. 3 of the CIRS.

gg) It further refers "…the records or documents that permit undertaking the control that is required, do not require any special formalism, only needing to contain the elements necessary to validate the amounts paid". It further expresses: "It is not questioned that the claimant is displaced to perform functions in other locations".

hh) It concludes: "the fact that those amounts are fixed does not exempt compliance with the limits that define its taxation. Such values might even make sense, if the displacements were similar every month, or if they were for such long periods that their ascertainment would be difficult, or if, at the end, an adjustment were made". "Now, in this case, none of this occurs. To which is added the fact that the supposed cost allowances are also paid by way of holiday allowance and Christmas allowance".

ii) As to the burden of proof regarding the remunerative or compensatory nature of the allocations in question, it concludes: "could only rest on AT if either the claimant or the company had provided the information on the daily amount of cost allowance, itemized by displacement abroad or displacement within Portugal."

jj) It closes, both in its response and in its arguments, arguing for dismissal of the arbitration petition.

II - QUESTIONS FOR THE TRIBUNAL TO RESOLVE

Essentially what is being discussed in this case is whether the document at pages 24/121 of the PA is sufficient (competent) to determine the quantitative limit not subject to Personal Income Tax (Article 2, No. 3, paragraph d) of the CIRS) and the qualitative limit (cost allowances are taxable, when or to the extent that the requirements for their allocation to civil servants are not observed). The main requirement for allocation of cost allowances to civil servants is the actual displacement of the official on service to a location different from his necessary domicile.

The reasoning for the contested act is contained in the Tax Inspection Report at pages 14/121 of the PA and there is stated the fundamental reason for the divergence between AT and the taxpayer: "… the employer does not have, for each payment made, a record through which it is possible to verify the displacements to which those charges refer, namely their respective locations, time of stay and purpose".

The entire dispute revolves around this document (reproduced in 11) of Part III): the taxpayer and apparently his employer understand that – given the circumstances of the activity – such document is illuminating, but AT understands it is not, although it recognizes that the same requires no special requirements.

III. PROVEN AND UNPROVEN FACTS AND REASONING

With relevance to the decision to be rendered, the following are the facts considered proven, with the respective documents indicated (proof by documents), as reasoning:

Proven Facts

1. AT proceeded with an official Personal Income Tax assessment for the year 2010, numbered 2014… (according to AT's response) and numbered … dated 21-11-2014 (according to the arbitration petition) generating a tax collection of 4,649.92 euros and default interest of 1,041.93 euros, totaling 5,691.75 euros; – preamble of the arbitration petition, Article 1 of the response and page 3/121 of the PA;

2. Such official assessment is the consequence of an inspection procedure under Article 46 of the Tax Inspection Procedure Regulation (RCPIT), Inspection Order 2012… of 11.07.2012, directed at the taxpayer … resident in Lane …, lot …, . – ..., since he received the amount of 1,633.00 euros x 14 in the year 2010, totaling 22,862.00 euros, by way of cost allowances, which amount was not declared in the income tax return for the year 2010; – Articles 17 and 20 of the arbitration petition; second part of Article 3 of the response and purport of the PA.

3. The Claimant became aware of the existence in his name of an official assessment through summons for enforcement proceedings – Documents Nos. 1 and 2 attached with the arbitration petition.

4. In the inspection report it appears that the Claimant's salary is paid by B… – Branch in Portugal, with establishment in ..., being composed of a base salary (€800 monthly) plus a component paid by way of cost allowances, in the fixed amount of €1,633.00 per month, including holiday allowance and Christmas allowance of the same amount - as per copies of payslips - pages 14 and 17 to 23 of the PA.

5. The claimant has been a dependent worker of company B… – Branch in Portugal since 1 April 2007, hired as a project laborer, having remained in the company's service since then – Articles 8 and 10 of the arbitration petition, document No. 3 attached to the arbitration petition and pages 13 and 14 of the PA

6. B… is a company whose activity consists in carrying out works on soil in maritime and coastal areas, for example coastal defense, beach sand reinforcement, dredging of river beds and sea bottoms – Article 9 of the arbitration petition.

7. Within the scope of the contract referred to in 5) the Claimant's place of work "shall be the location of the contract, with the worker hereby consenting to all displacements that prove necessary to the performance of his professional activity" – Document No. 3 attached to the arbitration petition.

8. In the employment contract dated 03 April 2007 the Claimant's residence appears as Avenue … No. …-… … Lisbon and in the arbitration petition it appears as Lane …, lot … … . – Preamble of the arbitration petition, document No. 3 attached to the arbitration petition and notifications contained in the PA.

9. On a date not determined between B… – Branch in Portugal and the claimant, the allocation to the worker was stipulated of a fixed monthly amount of 1,633.00 euros x 14, designated as "cost allowances" with the intent to cover food and accommodation expenses in displacements – Article 15 of the arbitration petition and overall position of AT in the response and arguments.

10. It is policy of B… – Branch in Portugal to allocate to workers such as the claimant amounts by way of cost allowances in fixed amounts paid in 14 monthly installments – Article 15 of the arbitration petition and tacit acceptance by AT given its overall position adopted in the response and arguments.

11. The Claimant during the year 2010 was displaced in Spain for 246 days and in Portugal for 47 days according to document with the following tenor (as per pages 14 and 24 of the PA):

A… – Displacements 2010

1. The Claimant delivered the present arbitration petition to CAAD on 23-03-2015 - Registration in CAAD's Case Management System.

Unproven Facts

There is no other factual matter alleged that has not been considered proven and that is relevant to the composition of the dispute.

Matter of subsection 9) – The employment contract does not contain the allocation of the fixed monthly amount that the claimant claims to be "cost allowances". The SAT considers that the absence of AT taking a position as to the date such agreement was made, in a form other than written form, subsequent to the signing of the employment contract, revealed by the purport of the payslips attached to the case, means tacit acceptance of that factual basis, occurring on a date not determined between 03 April 2007 and, at least, January 2010.

Matter of subsection 10) – Although in the inspection report, in AT's response and in the arguments, no reference was found to the fact of this way of paying the so-called "cost allowances" (fixed amount x 14) by this particular company, not only to this worker but to others in identical functions, the SAT given what is referred in Article 15 of the arbitration petition, the overall position of the claimant and the overall position of the respondent, convinced itself that this is a generalized form of conduct by the company with a certain category of workers, namely those who work at construction work sites (see Nos. 1 to 5 of the claimant's arguments and Articles 55 to 60 of the arbitration petition).

IV. EXAMINATION OF QUESTIONS FOR THE SAT TO RESOLVE

The questions to be resolved which, essentially, center on the evaluation or non-evaluation of the content of the document reproduced in 11) of the factual matters (Part III) seem to be simplified by the clear and open manner in which AT brought to the case its reading of law and facts. Let us see:

• It refers that "it is not questioned that the claimant is displaced to perform functions in other locations";

• And furthermore: "the records or documents that permit undertaking the control that is required do not require any special formalism".

• And specifies further: "… the employer does not have, for each payment made, a record through which it is possible to verify the displacements to which those charges refer, namely their respective locations, time of stay and purpose" (our emphasis).

That is, what essentially separates AT's position from the taxpayer's position is the non-existence "for each payment made [of] a record through which it is possible to verify the displacements to which those charges refer, namely their respective locations, time of stay and purpose".

Regarding the burden of proof – relating to the remunerative or compensatory nature for expenses incurred for the benefit of the employer – AT refers that the same could only rest on it "if either the claimant or the company had provided the information on the daily amount of cost allowance, itemized by displacement abroad or displacement within Portugal".

That is, the central question is always the evaluation or non-evaluation of the document reproduced in 11) of the factual matters (Part III).

Now, the quantitative limit not subject to Personal Income Tax (Article 2, No. 3, paragraph d) of the CIRS) is not being discussed here, nor was such question raised during the inspection procedure.

What is being discussed here is the qualitative limit (cost allowances are taxable, when or to the extent that the requirements for their allocation to civil servants are not observed).

The main requirement for allocation of cost allowances to civil servants is the actual displacement of the official on service to a location different from his necessary domicile.

But this requirement, in this case, is documented and AT does not question the occurrence of the displacements. The document reproduced in 11) of the factual matters (Part III) is illuminating and sufficiently clarifying of its actual occurrence.

The question then arises (following the summary of the judgment of the Administrative Tax Court, Judge-Reporter Sr. Appellate Judge José Correia, case 4592/11 of 29.03.2011, available at www.dgsi.pt) whether, in this case, there are elements of proof that permit AT to conclude, in exercise of its power-duty to control compliance with tax legality on the part of the taxpayer, that:

· The displacements actually took place;

· That the same justify the payment of cost allowances;

· That although a fixed amount x 14 payments was paid, that total amount does not exceed the maximum limit not subject to Personal Income Tax for the days in which the displacements actually occurred (question which, as mentioned above, was not even discussed in the reasoning of the act now contested).

For the inspection report did not even discuss whether in this case payment to the Claimant of any amounts by way of cost allowances was justified, taking into account the type of company activity and the type of service rendered by the taxpayer, necessarily at sea ports along the Portuguese, Spanish or other coastlines.

The document reproduced in 11) of the factual matters given as proven, in its literal element permits extraction of the "respective locations, time of stay and purpose". The purpose is contained in the functions themselves of the taxpayer and in the company's activity.

It also permits ascertainment of the daily reference value considered in the cost allowances (for purposes of ascertaining the limit not subject to Personal Income Tax and Social Security contributions), both in displacements in Portugal and in displacements abroad. There is expressed the limit considered: 246 - 148.91 (abroad); 47 - 62.35 (in Portugal).

AT alleges that "the employer does not have, for each payment made, a record through which it is possible to verify the displacements to which those charges refer, namely their respective locations, time of stay and purpose".

As stated, the document under discussion permits ascertainment of the location where the displacement occurred, the time of stay and the purpose. The purpose configures itself as obvious given the type of company and type of activity performed by the employee: carrying out the contract for the duration of its execution.

We do not see how it can be derived from the law that it is a condition of material acceptance of an allocation by an employer to a worker, by way of cost allowances, that the same must be formally documented in a single record for each payment.

Such requirement might make sense in certain companies, but in a company such as that which appears as the employer of the claimant (with works in maritime locations along the Portuguese and Spanish coast, in 2010) and as to the exercise of the functions incumbent on the worker to render at those work sites, it does not appear to us economically irrational for the company to opt for payment of a fixed monthly amount to the worker to compensate him for the approximate costs he might incur with his food and accommodation expenses.

The payment of cost allowances in this manner to a displaced worker does not, in itself, constitute an indicator that such sums are not cost allowances (judgment of the Administrative Court, case 237/66 of 13.02.2014).

In this case AT had at its disposal the sufficient documentary and factual elements to be able to assess that the allocations delivered to the taxpayer, although in fixed and monthly form by way of cost allowances, do not globally exceed the maximum limits that result from paragraph d) of Article 2, No. 3 of the CIRS, correspond to actual displacements for the benefit of the employer and, being their allocation generalized to all functions of the company identical to the Claimant's, the way of allocation by fixed monthly amount will have justification in reasons of efficiency and simplification of payroll management.

It was not even questioned whether it was the Claimant's employer who directly paid his accommodation and food during his displacements at the various work sites. Nor was it questioned that the displacements did not occur as documented in the document of subsection 11) of Part III.

Given the proof here produced as to the manner in which the Claimant exercised in 2010 his work for the employer, displaced 246 days in Spain and 47 days in Portugal but in locations distant from his personal domicile; given the absence of proof that the displacements did not take place or the employer directly bore those accommodation and food costs or that the legal limits provided for allocation of cost allowances were exceeded, the SAT concludes that the requirements are not met that would permit concluding that the allocations here under discussion have the nature of remuneration (patrimonial increase), configuring themselves as having compensatory nature for accommodation and food expenses incurred by the taxpayer in service and for the benefit of his employer.

Accordingly it is considered that the arbitration petition is well-founded since the official Personal Income Tax assessment is not in accordance with the rule contained in paragraph d) of Article 2, No. 3 of the CIRS.

V. OPERATIVE PART

In accordance with and based on the grounds set out above, it is:

Decided:

1. The arbitration petition is well-founded and the official Personal Income Tax assessment for the year 2010, numbered 2014… (according to AT's response) and numbered … dated 21-11-2014 (according to the arbitration petition) generating a tax collection of 4,649.92 euros and default interest of 1,041.93 euros, totaling 5,691.75 euros, is annulled for being in non-conformity with the rule contained in paragraph d) of Article 2, No. 3 of the CIRS.

2. The associated assessment of default interest is accordingly annulled.

Value of the case: in accordance with the provisions of Article 3, No. 2 of the Costs Regulation in Tax Arbitration Proceedings (and paragraph a) of Article 97A, No. 1 of the Code of Tax Procedure), the case is valued at 5,691.75 euros.

Costs: in accordance with the provisions of Article 22, No. 4, of the RJAT, the amount of costs is fixed at € 612.00, according to Table I attached to the Costs Regulation in Tax Arbitration Proceedings, at the expense of the Respondent.

Let notification be made.

Lisbon, 05 October 2015

Singular Arbitral Tribunal (SAT),

Augusto Vieira

Text prepared by computer in accordance with the provisions of Article 131, No. 5, of the Code of Civil Procedure, applicable by reference to Article 29 of the RJAT.

The drafting of the present decision is governed by the spelling prior to the Orthographic Agreement of 1990.