CAAD Arbitration on IRS Taxation of Travel Allowances (Ajudas de Custo) Under Article 2 CIRS

ARBITRAL DECISION

Claimant: A…

Respondent: Tax and Customs Authority

Subject Matter: Personal Income Tax – travel allowances, legal limits, art. 2, no. 3, d) and no. 14, of the Personal Income Tax Code

I – REPORT

1. On 23 March 2015, A…, taxpayer with TIN …, resident in …, Shop …, …, ..., appeared, in accordance with articles 2, no. 1, paragraph a) and 10, no. 1, of the Legal Regime for Tax Arbitration (LRTA), approved by Decree-Law no. 10/2011, of 20 January, to submit a Request for Arbitral Pronouncement with a view to declaring the illegality of the Personal Income Tax assessment and compensatory interest contained in document no. 2014…, dated 20/11/2014, relating to the year 2010, in the total amount of €1,960.04 (one thousand nine hundred and sixty euros and four cents). With the initial petition were attached, in addition to the collection document, powers of attorney and proof of payment of the fee, three documents.

2. In the Request for Arbitral Pronouncement, the Claimant chose not to appoint an arbitrator, and by decision of the President of the Ethics Council, in accordance with no. 1 of article 6 of the LRTA, the undersigned was appointed as sole arbitrator, and accepted the position within the legally stipulated timeframe.

3. The arbitral tribunal was constituted on 2 June 2015.

4. The Tax and Customs Authority (TA or Respondent) sent its Response and the administrative file on 9 and 14 July 2015, respectively.

5. On 26 October 2015, the meeting provided for in article 18 of the LRTA took place, proceeding, in accordance with prior arbitral order, to the hearing of two witnesses indicated by the Claimant. The parties waived the submission of arguments, and 1 December 2015 was set for delivery of the arbitral decision.

6. The Request for Pronouncement

In the initial petition, the Claimant argued, in summary (our responsibility):

• Since 1 September 2009, he has been an employee of company B… – Branch in Portugal (B…), a company whose activity consists of carrying out works on soils in maritime and coastal areas, for example coastal protection, sand reinforcement on beaches, dredging of river beds and seabeds.

• He was hired to exercise functions as a civil engineer, and has remained in the service of the company since then, with functions whose description includes the preparation of proposals for public tenders, supervision tasks and monitoring of works carried out in Portugal and abroad by the employer.

• The function exercised implies frequent relocations and presence on the construction sites of his employer, both in Portugal and abroad.

• In order to compensate the employee for food and accommodation expenses that these relocations entail, B… awards him, as is company policy, certain amounts as travel allowances.

• From the analysis conducted by the TA on his tax return for the year 2010, an increase of €5,048.19 resulted in the taxable income for that year: the amount of €1,263.09 for cumulative meal subsidy with travel allowances and the amount of €3,785.10 regarding travel allowances considered as excess in relation to legal limits.

• As regards the correction relating to the amount of €1,263.09, meal subsidy, he acknowledges that it was not previously paid due to processing error by the company, since it corresponded to an amount that could not be awarded cumulatively with travel allowances, and he accepted the tax assessment resulting from that correction, having already proceeded, on 5 January 2015, to pay the corresponding tax amount calculated, in the value of €315.39.

• However, he does not accept the correction regarding the allowance of "travel allowances" because it corresponds to amounts awarded by the employer – given the activity of the company and the claimant's functions which require frequent and sometimes unforeseen presences on the construction sites of works both in Portugal and abroad – to compensate him, approximately, for the respective relocations.

• In analyzing the map of travel allowances, the tax inspection services concluded that in the months of March, May, August and November there were travel allowances paid above the legal limit, but they ignored that in the remaining months the claimant received an amount of travel allowances below the legal limit, so that (taking into account what was received in less in January and February; June and July and September and October), the Claimant ended up receiving, in the total for the year, €5,679.15 less than the maximum value of travel allowances to which he would be legally entitled.

• The explanation for payment below and above the limits according to the months is due to the fact that, given the complexity of salary processing itself (number of days per month, holidays, variations in remuneration, withholdings, etc.) and the unpredictability of the Claimant's relocations, the employer chose to adopt annual control of the payment of travel allowances awarded on an annual basis.

• Therefore, on an annual basis, which is the basis for assessment of Personal Income Tax, in accordance with art. 22 of the Personal Income Tax Code, the travel allowances actually paid were €5,679.15 below the respective legal limit taking into account the days and locations of relocation, and Decree-Law no. 106/98, of 24 April, itself provides, in arts. 35 and 36, for civil servants mechanisms for advance and subsequent award of travel allowances as well as corresponding adjustments.

• The TA, by ignoring that the values to be considered should be the global values of 2010 and not the monthly values necessarily subject to adjustments and corrections, because Personal Income Tax is an annual basis tax in which what is taxed is the global income of the year and not each one of its months separately, violated the principle of material truth in taxation (art. 5, no. 2, of the General Tax Law) and the principle of prevalence of substance over form in the interpretation of tax norms (art. 11, no. 3, of the General Tax Law and art. 22 of the Personal Income Tax Code).

• The request for arbitral pronouncement should be judged well-founded and the illegality declared, with consequent annulment of the Personal Income Tax assessments and compensatory interest (doc. no. 2014…) and all legal consequences.

1. The Response

The Respondent responds, in summary (our responsibility):

• Objecting to the corrections proposed by the TA upon detecting situations in which the daily legal limits were exceeded, in view of the provisions of article 23-A of the Corporate Income Tax Code, no. 1, paragraph h), and no. 3 of article 2 of the Personal Income Tax Code, the Claimant considers that the amounts paid as travel allowances are subject to annual accounting in accordance with the annual basis of Personal Income Tax, and the legal limits cannot be assessed monthly.

• Reiterating the content of the Tax Inspection Report, travel allowances are paid daily, as is their legal limit fixed daily, whether the relocation is in national territory or abroad, as is expressly determined in Ordinance 1553-D/2008, of 31 December, for the year in question (€62.75 for relocations in Portugal and €148.91 for relocations abroad).

• That everything exceeding the daily legal amount of travel allowances must be subject to taxation because these are not subject to annual accounting but rather daily accounting results from Decree-Law 106/98, of 24/04, where it is stated that travel allowances are intended to ensure daily relocation needs.

• The Claimant's claim, to the effect of requesting compensations in order to make adjustments between months in which he received more and those in which he received less, is unfounded as it would represent the establishment of a "travel allowance bank," contrary to current legislation.

• Articles 35 and 36 of the aforementioned legislation do not establish a mechanism for advance and subsequent award of travel allowances, merely recognizing different payment modalities and not a right to receive travel allowances.

• From the analysis of the documents attached results verification of an excess in the daily value of travel allowances when compared with the legal limit, there being no rule that permits the TA to effect the accounting of travel allowances without having as basis and as maximum reference the daily value established in the law.

• Also lacking in sustainability are the alleged violations of the principle of material truth in taxation contained in article 5, no. 2, of the General Tax Law and the rule of prevalence of substance over form in the interpretation of tax norms (article 11, no. 3 of the General Tax Law).

• The TA cannot be defended in not requiring compliance with a legal requirement, under penalty of violation of the principle of legality and other legal and constitutional principles, so the request should be judged unfounded.

1. Object of the Request

The legal question to be decided in the present proceeding consists of determining, in the case of amounts received by an employee as title of travel allowances paid by the respective employer, how to interpret the provisions of paragraph d) of no. 3 of article 2 and no. 14 of the same article, of the Personal Income Tax Code, in order to determine what amount is not subject to the tax in question.

1. Preliminary Ruling

The arbitral tribunal is materially competent, in accordance with the provisions of articles 2, no. 1, paragraph a) of the Legal Regime for Tax Arbitration.

The parties have personality and judicial capacity and have standing in accordance with articles 4 and 10, no. 2, of the Legal Regime for Tax Arbitration and article 1 of Ordinance no. 112-A/2011, of 22 March.

The proceeding does not suffer from any nullity nor have any exceptions been raised by the parties that impede the examination of the merits of the case, so the conditions are met for delivery of the arbitral decision.

II GROUNDS

1. Established Facts

10.1. C…, a Danish company, which acts in Portugal through "B…, Branch in Portugal," with TIN …, located at … – …, P.O. Box …-…-…, ..., is a company that carries out works on soils in maritime and coastal areas in coastal defense, sand reinforcement on beaches, dredging of river beds and seabeds (Request for pronouncement, art. 2, documentation contained in the file and witness testimony).

10.2. In a document dated 1 September 2001, the Claimant, then resident in Urbanization …, no. … ...- … – Alcochete, entered into a "fixed-term employment contract" with B…, Branch in Portugal, for the exercise of the function of civil engineer in the public works "Maintenance Dredging Works at the Oil Terminal," awarded to the employer by D…, SA, as well as the preparation/elaboration of the proposal to be presented in the context of the Public Tender opened by E…, with a view to awarding identical works and possible monitoring thereof during the period of the contract, and also the launching of activity in Spanish territory (Doc. no. 2, attached with the Request for pronouncement, clause three).

10.3. The contract referred to in the previous number, executed "in accordance with articles 41 and following of the legal regime attached to Decree-Law no. 64-A/89, of 27 February," had a validity of one year (Doc. no. 2 attached with the Request, clause two).

10.4. The employment contract referred to in the preceding numbers provided for a monthly base remuneration of €299,000$00, subject to legally required withholdings, and the right to holidays and holiday bonus and, also, that "any other working conditions not expressly provided for in the clauses above will be governed by the applicable legal provisions, as well as by current practices and internal regulations of the employer" (Clause fifteen of the employment contract contained in doc. no. 2 attached with the request).

10.5. In the Personal Income Tax income statement for 2010, the Claimant declared that he had earned as income from category A the amount of €27,720.00, as a result of work performed by the first Claimant for the company B… Branch Portugal … (no. 9 of the Response, Tax Inspection Report, II.3., Doc. no. 3 attached with the Request and PA1).

10.6. As a result of automatic information exchange between Portugal and Denmark to prevent double international taxation and tax evasion in the field of income taxes, the Finance Directorate of Setúbal was informed by the Directorate of International Relations Services that the taxpayer had earned income from abroad (Denmark), in the value of 568,166 Danish Crowns (PA1, Tax Inspection Report, II.4.2.).

10.7. The Finance Directorate of Setúbal notified the Claimant to regularize the failure to include in his Personal Income Tax declaration the amount of €76,213.79 of income obtained in Denmark, through official letters no. … and …, respectively of 14 May and 5 June 2012, but which were not received, and the Claimant, in a subsequent telephone contact, stated that he had not earned such income (Response, article 5).

10.8. Upon request, through official letter no. …, of 12 August 2014, from the Finance Directorate of Setúbal, for elements and clarifications from B…, Branch in Portugal, the latter replied that "The taxpayer under analysis is not an employee of the parent company, but rather of the branch in Portugal and that in 2010 he did not exercise any activity in Denmark. The income earned is what appears in the statement issued by B… – BRANCH IN PORTUGAL (…), and sent a copy of a statement, in accordance with article 119 of the Personal Income Tax Code, of income earned in the year 2010 by Employee "A…", showing the following values: €27,720.00, of income subject to Personal Income Tax; €35,797.20, of income exempt from Personal Income Tax; €4,944.00 of withholdings of Personal Income Tax and €3,049.20 of contributions to Social Security (Report of Tax Inspection, point II.4.2., and annex 4).

10.9. In response to the supplementary request made to B…, by official letter no. …, of 9 September 2014 from the Finance Directorate of Setúbal, for clarification of the income exempt from Personal Income Tax paid to the taxpayer in the amount of €35,797.20 and supporting documents of the respective payments, B… sent, on 23 September 2014, the requested elements, clarifying that the amount of €35,797.20 is composed of €34,302.84 of travel allowances for relocations carried out in works located in Portugal and abroad and €1,494.36 of meal subsidy, and that the Claimant was relocated in 2010 for 70 days in Portugal and 239 abroad. It further clarified that the company had opted to pay travel allowances "according to an estimated calculation always ensuring that the values paid in each fiscal year are below the legally provided exemption limits," so that, "taking into account the daily limits paid as the daily limits of €62.75 for relocations in Portugal and €148.91 for relocations abroad and the number of actual relocation days – 70 in Portugal, 239 abroad – results the legal limit of €39,981.99 for the payment of tax-exempt travel allowances," verifying that the value of travel allowances paid – €34,302.84 – is below the referred limit. Attached 13 documents, 12 pay slips in 2010 and one schedule supporting the travel allowances relating to relocations in that year. (Report of Tax Inspection, point II.4.2. and annexes 5 and 6).

10.10. All pay slips paid by B… to the Claimant in 2010 contain an identical amount of "remuneration" to be received monthly, encompassing under that designation "base salary" (€1,980.00), "meal subsidy" (€118.60) and "travel allowances" (€2,421.20 in 10 months and in the amount of €4,955.07 and €5,015.07 in the months of July and November, when the holiday and Christmas bonus were paid (PA 2, annex 6 to the Tax Inspection Report).

10.11. In the schedule supporting travel allowances "for purposes of art. 45, no. 1, paragraph f) of the Corporate Income Tax Code," the company declared the Claimant's relocations to the employer's works: in January, 23 days in Spain and 5 days in Brazil; in February, 4 days in Brazil and 23 days in Spain; in March, 5 days in Portugal; in April, 14 days in Portugal and 16 days in Spain; in May, 31 days in Spain; in June, 20 days in Spain; in July, 31 days in Spain; in September, 30 days in Spain; in October, 24 days in Portugal and 7 days in Spain; in November, 7 days in Portugal and 23 days in Spain; in December, 20 days in Portugal and 11 days in Brazil (PA, Tax Inspection Report, III.1.1. and annex 6).

10.12. The analysis carried out in the inspection procedure based on Internal Service Order no. OI2013…, issued by the Tax Inspection Service of the Finance Directorate of Setúbal, proposed corrections to the Claimant's 2010 income, translated into an increase of €5,048.19 of taxable income, corresponding to the amount of €1,263.09 to the total meal subsidy improperly cumulated with travel allowances, and the amount of €3,785.10 to the value of travel allowances considered in excess in relation to legal limits (art. 11 of the Request, Tax Inspection Report, III.1. and III.2.).

10.13. The draft Tax Inspection Report, proposing correction to the Claimant's category A income, was sent through official letter no. … of 14 October 2014, for purposes of exercising the right to be heard (PA 2, fls. 46).

10.14. The Claimant, through a document filed with the Finance Directorate of Coimbra on 8 November 2014, exercised the right to be heard by accepting the proposed corrections in the amount of €1,263.09 relating to meal subsidies paid in cumulation with travel allowances and contesting the proposed correction of €3,785.10 (PA 2, fls. 47 to 51).

10.15. The arguments presented in the hearing were analyzed in a memorandum of 3 November, which proposed approval of the Final Tax Inspection Report, with the Team Leader's Opinion highlighting that "in accordance with the facts and grounds described in the report, it was verified that the taxpayer received as title of travel allowances the amount of 3,785.10, which in accordance with paragraph d) of no. 3 of art. 2 of the Personal Income Tax Code, is considered as income from dependent work, as it exceeds the legally established limits and provided for in Ordinance 1553-D/2008, of 31/12. It was equally verified that the taxpayer received meal subsidy on the days when he was relocated and received travel allowances, a value that amounts to €1,263.09 and which in accordance with no. 2 of art. 2 of the Personal Income Tax Code is considered as income from dependent work" and "given that the taxpayer did not include this income, the correction will proceed in the total of €5,048.19" and "a corresponding correction document will be prepared" (PA, Tax Inspection Report).

10.16. The conversion of the draft into the Final Report was the subject of the decision of the Director of Finance of Setúbal, of 12 November 2014, with the report being notified (in second notice) to the Claimant, through official letter no. … from the Finance Directorate of Faro, of 27 November 2014, and to his Authorized Representative, by official letter of 13 November (PA 1, attached to the file).

10.17. After notification of assessment no. 2014 …, the Claimant directed a statement to the Chief of the Finance Service accepting the corrections made by the TA relating to the amount of €1,263.09 earned as title of meal subsidy, declaring he intended to pay the tax resulting from that correction, which he calculated to correspond to an amount of €315.39, and therefore requested the issuance of the respective payment slip. (Document no. 4 attached with the Request).

10.18. After adjustment of accounts - compensation dated 20 November 2014 - a collection document was issued for payment of the amount of €315.39 for payment by 29 December 2014 (Doc. 6 attached with the Request).

10.19. As a result of the adjustment of accounts and compensation effected on 20 November 2014, the Claimant was notified of the assessment document no. 2014…, for payment of the total amount of €1,960.04 (one thousand nine hundred and sixty euros and four cents) by 29 December 2014 (Request and collection document introduced with the Request).

10.20. The present request for arbitral pronouncement was submitted by the Claimant on 23 March 2015.

1. Unestablished Facts

There are no unestablished facts to be considered as relevant to the decision of the present proceeding.

1. Grounds for the Established and Unestablished Facts

The facts were established and unestablished based on the assessment made by the tribunal of the procedural documents delivered by the Parties and the analysis of the documents attached to the file, namely the administrative file, as referenced in relation to each of the points of the established facts.

1. Application of Law

13.1. Taxation of Work Income and Travel Allowances

13.1.1. Work Income According to Labor Law

In the present dispute the Parties are in agreement as to the existence of a dependent work relationship between the Claimant and B…, Branch in Portugal, invoking the Claimant the application of an employment contract attached to the file, dated 2001.

According to the Labor Code in force, approved by Law no. 7/2009, of 12 February, "employment contract is that by which a natural person undertakes, for remuneration, to provide his activity to another or others, within the scope of organization and under their authority" (art. 11) and "remuneration is considered to be the provision to which, in accordance with the contract, the rules governing it or the customs, the worker is entitled in return for his work", comprising "the base remuneration and other regular and periodic provisions made, directly or indirectly, in cash or in kind," with the presumption that "any provision by the employer to the worker shall be presumed to constitute remuneration" (article 258, nos. 1 to 3). The worker is entitled to Christmas bonus equal to one month's remuneration (art. 263, no. 1) and is entitled to holiday bonus, comprising the base remuneration and other remuneration provisions that are the counterpart of the specific mode of execution of the work, corresponding to the minimum duration of holidays (art. 264, no. 2).

With interest for the case under examination, article 260, no. 1 further provides that "The following are not considered remuneration: a) Amounts received as title of travel allowances, travel bonuses, transport expenses, installation bonuses and other equivalent amounts, owed to the worker for relocations, new installations or expenses incurred in the service of the employer, except when, being such relocations or expenses frequent, such amounts, in the part exceeding their respective normal amounts, have been provided for in the contract or should be considered by custom as an integral element of the worker's remuneration".

The concepts referred to above do not constitute any rupture with the preceding legislation, so one may reproduce, as they merit the agreement of this tribunal, the considerations and doctrinal citations made in the Decision handed down by the Court of Appeals, on 5 June 2003, proc. no. 05036/01 (Reporting Judge Dulce Neto), namely:

• Remuneration appears as a set of values, expressed or not in currency, to which the worker is entitled, by contractual or normative title, corresponding to a duty of the employer, integrating all benefits granted by the employer entity that are intended to integrate the worker's normal budget, conferring upon him the fair expectation of receiving it given its regular and continuous periodicity;

• Remuneration excludes only those provisions which, although being owed, have merely occasional character (e.g., remuneration for supplementary work - art. 86° of the Labor Code) and those which translate into simple compensations or reimbursements for worker's expenses incurred in the service of the employer - art. 87° of the Labor Code);

• Travel allowances (and other provisions then enumerated in art. 87° of the Labor Code) are aimed at compensating the worker for expenses incurred in the service of and in favor of the employer and which, for reasons of convenience, were borne by the worker himself, not constituting a return for the worker's provision, characteristic of remuneration;

• Doctrine emphasizes that the essential characteristic of these provisions is the fact that they represent a compensation or reimbursement for the expenses to which the worker was obliged as a result of occasional relocations and installations he had to undertake in service, with no reciprocity existing in their receipt in relation to the work (cf. Jorge Leite and Coutinho de Almeida, in "Collection of Labor Laws"; p. 89 et seq.; Menezes Cordeiro, in "Manual of Labor Law"; pp. 721 et seq. and Monteiro Fernandes, in "Labor Law"; vol. I, 8th edition, pp. 361 et seq.).

• Thus, amounts paid as title of travel allowances may or may not be considered part of remuneration, depending on the reality underlying them.

13.1.2. Taxation of Dependent Work Income in Personal Income Tax and Travel Allowances

The Personal Income Tax Code includes in its tax base the income from dependent work (category A), all remuneration paid or made available to its holder, arising, in particular, from work performed on behalf of another under an individual employment contract or another legally equivalent to it and work performed under a service acquisition contract or another of identical nature, under the authority and direction of the person or entity occupying the position of active subject in the resulting legal relationship (paragraphs a) and b) of no. 1 of article 2 of the Personal Income Tax Code).

According to no. 2 of article 2 of the Personal Income Tax Code, the remuneration referred to in no. 1 "comprises, in particular, salaries, wages, emoluments, bonuses, percentages, commissions, participations, subsidies or premiums, attendance fees, fees, participations in fines and other accessory remunerations, whether periodic, fixed or variable, of a contractual nature or not".

The rules of the Personal Income Tax Code, in encompassing income obtained within the framework of subordinated work relationships or in equivalent situations, refer to labor law, but the tax law makes a very broad typification, with the purpose of "an exhaustive inclusion, in the tax base of all income in any way arising from dependent work".

Thus, no. 3 of article 2 of the Personal Income Tax Code proceeds to an exhaustive enumeration of payments considered as income from dependent work, although in many of them it considers them only partially, or with exclusion if certain presuppositions are met.

Paragraph d) of no. 3 of art. 2 provides that travel allowances and amounts received for the use of personal motor vehicle in the service of the employer are considered income from dependent work, "in the part in which both exceed the legal limits or when the presuppositions for their award to State servants are not observed, and sums for travel expenses, journeys or representation of which accounts have not been rendered by the end of the fiscal year".

The cases of non-subjection to tax of travel allowances are justified by not constituting actual income but a reimbursement or advance relating to expenses borne by the worker in the interest of the employer.

However, the non-subjection is conditioned, so as to prevent abusive practices.

For that reason, travel allowances are not excluded from taxation in situations in which the worker did not undertake the relocations in the service of the employer or in which, even if he undertook them, he did not bear the respective expenses.

Nor is the excess amount of travel allowances received excluded from taxation, if in their respective payment the legal limits imposed by paragraph d) of no. 3 of article 2 of the Personal Income Tax Code were exceeded.

With a view to determining the limits in question, no. 14 of article 2 of the Personal Income Tax Code provides: "The legal limits provided for in this article shall be those annually fixed for State servants."

That is, in the application of paragraph d) of no. 3 of article 2, one must take into account the legal regime of travel allowances and transport bonuses to Public Administration personnel when relocated due to reasons of public service".

At the time of the facts, Decree-Law no. 106/98, of 24 April 1998, was in force, with the tables of travel allowances (such as meal subsidies and travel bonuses, and other remuneration supplements) contained in Ordinance no. 1553-D/2008, of 31 December.

It is verified that in the file there is no disagreement between the Parties regarding the actual qualification of the amounts received by the Claimant as title of travel allowances: the Respondent was content with the proof made regarding the effectiveness of the declared relocations.

Nor is there controversy about the meeting of presuppositions to be able to receive travel allowances on the indicated days.

The disagreement is limited to the interpretation of the maximum limit of travel allowances – to what extent can it be considered as compensation for expenses incurred in the interest of the employer and not a form of indirect remuneration, accessory remuneration.

The Claimant argues that the amount of travel allowances capable of being considered compensation for expenses and not remuneration is assessed against the global values of the year in which such travel allowances are paid, arguing that Personal Income Tax is an annual basis tax in which what is taxed is the global income of the year and not each of its months separately, under penalty of disrespect of the principle of material truth in taxation (art. 5, no. 2, of the General Tax Law) and not of the prevalence of substance over form in the interpretation of tax norms (art. 11, no. 3, of the General Tax Law and art. 22 of the Personal Income Tax Code).

The Respondent, for its part, considers that, as expressly determined in Ordinance 1553-D/2008 of 31 December, travel allowances are paid daily, whether the relocation is in national territory or abroad, and their legal limit is fixed daily, so that everything exceeding the daily legal amount must be subject to taxation.

Let us see.

It follows from what has been said above that of the substantive tax presuppositions of the payment of travel allowances and their non-taxation, unambiguously chosen by tax law, what is in question in the present case is not the undertaking of the journeys and the right to travel allowances on the days indicated as relocation by the worker in the service of the employer but only the amount actually paid, in the part in which it exceeds the sum of the amounts corresponding to the days of relocation, taking into account the legal limits provided for in the legislation applicable to travel allowances paid within the context of Public Administration.

But how to interpret paragraph d) of no. 3 of art. 2 when it subjects to taxation travel allowances in the part in which they exceed the legal limits, taking into account that no. 14 of art. 2 refers to the legal limits annually fixed for State servants? What is the scope of the reference made in the Personal Income Tax Code to the regime of travel allowances paid within the Tax Authority?

Decree-Law no. 106/98, of 24/04, provides for the award of travel allowances in accordance with the tables in force and in accordance with the other rules of the legislation (art. 1, no. 1), with the amounts to be included "in the legal instrument that annually fixes the remuneration of officials and agents of Public Administration" (art. 38). The legislation contains rules whose content is reflected in the determination of the application of the tables, such as the concepts of daily relocations (art. 4), relocations for successive days" (art. 5), necessary residence, distance counting (art. 7), counting of relocation time (art. 8), alternative payment of reimbursement of expenses (art. 9), limit on relocation time (art. 11), specific rules on transport (arts. 16 to 31), joint relocations (art. 35), meal subsidy (art. 37).

Also Decree-Law no. 192/95, of 28/07, provides that "the table of travel allowances for relocations abroad is approved by ordinance of the Minister of Finance and annually revised in the legislation that updates the remuneration of officials and agents of Public Administration" (art. 4) (emphasis ours).

Pronouncing himself on the scope of the reference of the Personal Income Tax Code provisions to the regime of travel allowances in Public Administration, João Ricardo Catarino, in the study referred to above, argues that "private economic agents should only be considered subject to all that is provided in such regimes in terms of quantitative nature, in obedience to what is determined by no. 14 of article 2 of the Personal Income Tax Code".

Thus, he concluded, in particular, that in journeys to and abroad the allowance on the day of departure and arrival does not depend on any percentage depending on the time it takes place, and must be paid in full; private economic agents are not subject to the option for a three-star hotel; the limit of 90 days, although quantitative, should not be directly applicable as its rationale is typically public.

But he considered, as to the effects regarding Personal Income Tax, that:

• Whenever employers opt to pay the hotel they must respect the maximum limits of 70% fixed under penalty of taxation of the difference;

• The amount of travel allowances to be paid to the employee is not even subject to quantitative limitations in the law, so that, in the abstract, nothing prevents the award of amounts exceeding the legal limits. If the limits fixed for State servants are exceeded, the excess paid is considered, in that part, income of the worker. (emphasis ours).

In fact, the reference to the regime of travel allowances paid by the State, although limited to quantitative legal limits, encompasses what that fixing aims to demarcate what are payments by title of compensation for expenses incurred in relocation in the service of the employer and another type of compensation already with a remuneration character.

Hence, in situations in which, against the position of the Administration that travel allowances paid are characterized from the outset as remuneration for being awarded in accordance with the employment contract, in a certain and regular manner, it is invoked that it is "to be expected that in view of a certain activity (…) the employer calculates a value of travel allowances that, on average, he would receive per month of work and includes the right to that sum in the employment contract," it is essential, for the admissibility of travel allowances as compensation for relocations, the requirement that "whenever proof is made of the effectiveness of the relocations and the expenses incurred by the worker".

Thus, the reference of the Personal Income Tax Code rules to the regime of travel allowances paid to State servants is aimed at fixing, generically, the daily quantitative limits considered reasonable by the legislator for compensation of expenses with relocations actually undertaken, in the service of public or private entities.

Consequently, it makes no sense that the amount of travel allowances excluded from the concept of work income for corresponding to compensation of payment of expenses incurred with relocations in the service of the employer should in any case be determined by the total amount capable of being paid to the worker during a period equivalent to the total days of a year.

Nor does the expression "legal limits annually fixed for State servants" used in no. 14 of article 2 of the Personal Income Tax Code allow such interpretation. Annual fixing means that the amounts (calculated daily…) would be annually revised. The rule was created at a time when annual correction of remuneration and other payments made by the State were made, which corresponded, at least partially, to the restoration of purchasing power required by inflation.

Nor is there in the law any element capable of confirming the interpretation made by the Claimant that he would be entitled to see excluded from taxation an amount equal to the calculation of travel allowances virtually paid during all the days of a year.

Rather, the law regulates in detail the right to payment of travel allowances, and the reference of tax law to "legally fixed limits" cannot fail to encompass the conditions that define the quantitative amount of travel allowance accepted as compensation for expenses actually incurred.

13.2. Application of Law to the Facts

Taking into account the facts established and the legal grounds set out above, it is concluded in the same sense as the position defended in the file by the Respondent regarding travel allowances awarded to the Claimant - their limit, for purposes of exclusion from Personal Income Tax incidence, is assessed by the amounts paid daily and the difference, by excess, between the legal limit and the amount paid is no longer covered by the exclusion, but rather is considered work income covered by tax.

It is to be noted again that in this proceeding what was in question was not the global qualification of the amount paid to the Claimant as title of travel allowances but the determination of what was paid beyond the legally fixed limit, so that no comparison collates with jurisprudence analyzed in another proceeding decided by us (proceeding no.704/2014-T) nor with the decision taken therein.

And it will also be said that the present situation differs, in particular, from situations of award in a certain and constant manner, throughout the entire year, of amounts to workers relocated abroad, in which it is discussed whether the worker maintains the contractual workplace in Portugal (question relevant to the award of travel allowances owed by relocation) – cf. Decision of 8/11/2007, in proc. 1006/04; and of 30/9/2003, proc 700/03 and of 11/11/2003, proc 598/03), and in which the fundamental question (in those other cases) was exclusively the actual qualification of the payments made to the worker as title of travel allowances.

That is, in the case sub judice the Respondent did not question the right of the Claimant to payment of travel allowances for relocation - there is no controversy about the undertaking of relocations nor about the number of days in which they occurred - what is in question is the manner of calculation of the limit of the exclusion from taxation that results from article 2 of the Personal Income Tax Code, in view of the provision of no. 3, paragraph d), combined with no. 14.

And, as was stated and with the grounds set out, the Tribunal understands that the amounts that exceeded the legal limits fall within the scope of Personal Income Tax incidence in view of the referred provisions of its Code, so it considers the Request unfounded.

1. Decision

With the grounds set out, the arbitral tribunal decides:

• To judge unfounded the request for annulment of the Personal Income Tax assessment relating to the year 2010, in the total amount of €1,960.04 (one thousand nine hundred and sixty euros and four cents).

• To condemn the Claimant in costs.

1. Value of the Proceeding

In accordance with the provisions of no. 2 of article 306 of the Code of Civil Procedure, paragraph a) of no. 1 of article 97-A of the Code of Tax Procedure and also no. 2 of article 3 of the Regulations on Costs in Tax Arbitration Proceedings, the value of the proceeding is fixed at €1,960.04 (one thousand nine hundred and sixty euros and four cents).

1. Costs

For the purposes of the provisions of no. 2 of article 12 and no. 4 of article 22 of the LRTA and of no. 4 of article 4 of the Regulations on Costs in Tax Arbitration Proceedings, the amount of costs is fixed at €306.00 (three hundred and six euros), in accordance with Table I attached to said Regulations, to be borne entirely by the Claimant.

Notify.

Lisbon, 30 November 2015.

The Arbitrator

(Maria Manuela Roseiro)