IRS Dispute: Erroneous Qualification and Quantification of Income Under Simplified Regime (CAAD 226/2015-T)

ARBITRAL DECISION

I REPORT

A..., married, resident at Rua do..., n.º...–...Esq., ...-... Lisbon, corresponding to the Tax Office of Lisbon..., NIF..., and

B..., married to the foregoing and resident with him at Rua do..., n.º...–...Esq., ...-... Lisbon, corresponding to the Tax Office of Lisbon..., NIF...,

came, pursuant to the provisions of article 10 of Legislative Decree 10/2011, of 20 January and articles 99 et seq. of the Code of Procedure and Tributary Process (C.P.P.T.), to file a request for arbitral decision having as its subject matter the assessment no. 2014..., relating to IRS for the year 2013, in the amount of € 3,289.91.

The Requesters ask that this Tribunal declare the illegality of and consequently annul the aforesaid assessment, on the grounds of erroneous classification and quantification of income attributed to Requester A..., with the preparation of a new assessment purged of the amounts improperly considered as income and condemnation of the Tax Authority to refund the tax paid in the meantime, with indemnificatory interest.

They ground their request as follows:

1 – The requesters were notified of Assessment no. 2014..., which was made upon them by the Tax and Customs Authority, Collection Area, Personal Income Tax, resulting in the assessment of tax in the amount of € 3,289.91, relating to income from the year 2013, as appears from the assessment note, a copy of which is attached and is hereby deemed fully reproduced for all legal purposes. - Doc. 1

2 – The deadline for voluntary payment of the assessment ended on 2015-01-19. – Doc. 1

In this manner,

3 – And pursuant to the provisions of article 10, no. 1, paragraph a), of Legislative Decree 10/2011, of 20 January and in light of the provisions of nos. 1 and 2 of article 102 of the Code of Procedure and Tributary Process, the requesters are in time to request the constitution of an arbitral tribunal and ask for its decision on the illegality upon which assessment no. 2014... is based.

I – THE FACTS

4 – On 29 May 2014 the requesters delivered their income tax return for the year 2013, validated by the system with the validation code ... . – Doc. 2

5 – Requester A... is an attorney by profession, whilst requester B... is a civil servant. – Doc. 2

6 – From Annex B, model 3, relating to requester A... appears the professional activity exercised by him – activity 6010, in accordance with the table of activities contained in article 151 of the IRS Code, which corresponds to attorneys,

7 – An activity which the requester exercises under the simplified taxation regime, and from which he presented gross income in the year 2013 of € 58,996.52, resulting from professional services rendered to various entities. – Doc. 2

8 – Requester A... exercises, as mentioned, the profession of attorney, in the regime of liberal profession and renders his professional services to various clients, natural and legal persons, duly identified in the honorarium receipts.

9 – In the exercise of his professional activity and to cover expenses with the services rendered to his clients, the requester finds himself compelled to request certain amounts, which are called and constitute provisions, and which are intended to cover expenses inherent to the services rendered and which are the responsibility of his clients.

10 – In the year 2013 requester A... requested from some of his clients amounts intended to cover expenses with the matters entrusted, from which he issued the corresponding receipt, in accordance with the Personal Income Tax Code.

Thus,

11 – And in the year 2013 the requester issued electronic receipts corresponding to advances for payment of expenses on account of and in the name of clients in the total amount of € 9,552.79, all reported to the tax administration, through the issuance of electronic receipts, as follows:

Now then,

12 – Requester A... was notified by the Tax and Customs Authority that his income tax return for the year 2013 had been selected for analysis by reason of "The retained amounts on business and professional income declared are higher than those known". - Doc. 3

13 – The requester taxpayer was personally present at the Tax Office of Lisbon-..., on 3 July 2014, and provided the requested clarifications, having ascertained that there was an error in his income tax return in the sum of the amounts of tax withheld at source contained in his income tax return of € 12.50. – Doc. 4

14 – By official letter dated 17 November 2014 requester A... was notified to exercise his right to prior hearing in light of the Tax Authority's intention to correct the values entered in his income tax return, as follows: - Doc. 5

15 – The requester exercised his right to prior hearing, as results from the document delivered to the Tax Office of Lisbon..., on 27 November 2014, through which he made explicit the origin of his income, accepting the correction to be made in the values indicated as tax withheld at source, - Doc. 6

16 – And clarifying and documenting that the amount of € 9,552.79, which the Tax Authority intended to consider as income, were not in fact income, but rather amounts requested as advances for expenses that he had to incur on account of and in the name of clients. – Doc. 6

17 – The Tax Authority requested no further information and with the date of 1 December 2014, 3 days after the exercise of prior hearing, notified the requester that it would proceed to correct the income tax return. – Doc. 7

Now then,

18 – It is this correction, which forms the basis of assessment no. 2014..., which the requesters come to challenge, for it suffers from illegality, since it considers as income resulting from professional activity amounts that do not constitute any income.

19 – As referred to, requester A... exercises the professional activity of attorney under the simplified taxation regime and, although not possessing an organized accounting system, possesses an accounting system that satisfies the requirements appropriate for the correct determination and inspection of the tax, making entries in running account of the amounts received as provisions and the expenses that those provisions are intended to cover, as required by article 116 of the IRS Code.

In reality,

20 – The requester separately records the amounts which he receives from his clients and which are intended to cover expenses with the services that these entrust to him.

21 – This record, which is attached, together with the documents that serve as its support, which are likewise attached and which are deemed fully reproduced for all legal purposes, was never requested from the requester by the Tax Authority – Tax Office of Lisbon... . – Doc. 8

22 – The aforesaid record identifies the expenses covered to clients, which are entered in running account and supported by the documents evidencing the expenses actually incurred. – Doc. 8

Thus,

23 – Analyzing the receipts in question, we have:

a) Receipt …, in the amount of € 154.92, evidences the amount requested as a provision to cover payment of a court fee and request for a bailiff's provision within the framework of an identified judicial proceeding; - Doc. 8

b) Receipt …, in the amount of € 400.00, evidences the amount requested as a provision to cover payment of court fees and payments to a bailiff within the framework of an identified judicial proceeding and also postal expenses; - Doc. 8

c) Receipt …, in the amount of € 500.00, evidences the amount requested as a provision to cover expenses with a proceeding entrusted, of which by the end of the year 2013 only the amount marked with postal expenses had been spent; - Doc. 8

d) Receipt …, in the amount of € 102.00, evidences the amount requested as a provision to cover payment of two court fees with the institution of an injunction procedure; - Doc. 8

e) Receipt …, in the amount of € 20.40, evidences the amount requested as a provision to cover payment of a court certificate; - Doc. 8

f) Receipt …, in the amount of € 61.20, evidences the amount requested as a provision to cover payment of three court certificates, of which only two had been issued by the end of the year 2013; - Doc. 8

g) Receipt …, in the amount of € 54.78, evidences the amount requested as a provision to cover payment of a bailiff's provision within the framework of an identified judicial proceeding; - Doc. 8

h) Receipt …, in the amount of € 450.00, evidences the amount requested as a provision to cover payment of a court fee and request for a bailiff's provision within the framework of an identified judicial proceeding and postal expenses; - Doc. 8

i) Receipt …, in the amount of € 20.40, evidences the amount requested as a provision to cover payment of a court certificate; - Doc. 8

j) Receipt …, in the amount of € 1,000.00, evidences the amount requested as a provision to cover payment of expenses with a judicial action, payment having already been made as to an initial court fee; - Doc. 8

k) Receipt …, in the amount of € 800.00, evidences the amount requested as a provision to cover payment of expenses with a judicial action, payment having already been made as to a court fee; - Doc. 8

l) Receipt …, in the amount of € 750.00, evidences the amount requested as a provision to cover payment of expenses with a judicial action, payment having already been made as to a court fee; - Doc. 8

m) Receipt …, in the amount of € 500.00, evidences the amount requested as a provision to cover payment of expenses with two judicial actions, having already been issued an honorarium receipt for one of them, in which half of the provision was considered, and the other half used in payment of expenses with the proceeding; - Doc. 8

n) Receipt …, in the amount of € 324.89, evidences the amount requested as a provision to cover payment of part of a court certificate, payment to a bailiff within the framework of an identified judicial proceeding and the court fee owed by the institution of an injunction; - Doc. 8

o) Receipt …, in the amount of € 61.20, evidences the amount requested as a provision to cover payment of three court certificates, of which only two have been issued; - Doc. 8

p) Receipt …, in the amount of € 20.40, evidences the amount requested as a provision to cover payment of a court certificate; - Doc. 8

q) Receipt …, in the amount of € 30.60, evidences the amount requested as a provision to cover payment of part of a court certificate; - Doc. 8

r) Receipt …, in the amount of € 61.20, evidences the amount requested as a provision to cover payment of a court certificate; - Doc. 8

s) Receipt …, in the amount of € 40.80, evidences the amount requested as a provision to cover payment of two court certificates, of which only one has been issued; - Doc. 8

t) Receipt …, in the amount of € 500.00, evidences the amount requested as a provision to cover payment of a court fee with a judicial proceeding, land registry certificate, payment of a bailiff's provision within the framework of an identified judicial proceeding and postal expenses; - Doc. 8

u) Receipt …, in the amount of € 1,200.00, evidences the amount requested as a provision to cover payment of expenses with a judicial proceeding, of which part was used in payment of the court fee; - Doc. 8

v) Receipt …, in the amount of € 500.00, evidences the amount requested as a provision to cover payment of a court fee with a judicial proceeding, land registry certificate, payment of a bailiff's provision within the framework of an identified judicial proceeding; - Doc. 8

w) Receipt …, in the amount of € 500.00, evidences the amount requested as a provision to cover payment of expenses with a judicial proceeding, part of which has been used in payment of certificates and postal expenses; - Doc. 8

x) Receipt …, in the amount of € 500.00, evidences the amount requested as a provision to cover payment of expenses with a judicial proceeding, of which part was used in expenses and the remainder considered as honoraria, with refund to the client of the excess; - Doc. 8

y) Receipt …, in the amount of € 500.00, evidences the amount requested as a provision to cover payment of expenses with a judicial proceeding, part of which has already been used in payment of a court fee; - Doc. 8

z) Receipt …, in the amount of € 500.00, evidences the amount requested as a provision to cover payment of expenses with a judicial proceeding, part of which was used in payment of a certificate and the remainder considered as honoraria, from which a receipt was issued. - Doc. 8

24 – From the analysis of the foregoing and of the documents that support it, it is ascertained that the amounts requested by the requester as provisions, from which the due receipt was issued, in accordance with the Law, were intended to cover expenses for which the clients were responsible, which are duly documented and from which the requester accounted once the matters entrusted were concluded.

II – THE ILLEGALITY OF THE ASSESSMENT

25 – Article 2, no. 1, paragraph b) of the IRS Code establishes that professional income is considered to be that earned in the exercise on own account of any activity of service provision.

26 – As invoked, requester A... exercises the activity of attorney, and has adopted the simplified taxation regime.

27 – Article 116, no. 1, paragraph b) of the IRS Code provides that holders of category B income, when they do not have organized accounts, are obliged to separately record the amounts relating to reimbursement of expenses incurred in the name and on behalf of clients, which must be duly documented.

28 – This record, as follows from paragraphs b) and c) of no. 4 of article 116 of the IRS Code, must contain the identification of the provisions received, and the identification of the expenses, entered in running account.

29 – The record prepared by the requester, prepared in computerized form, as permitted by the tax administration, satisfies this requirement.

In fact,

30 – No. 6 of article 116 of the IRS Code even establishes that holders of category B income who, not being required to have organized accounting, nevertheless possess a system of accounting that satisfies the requirements appropriate for the correct determination and inspection of the tax may not make the records referred to in this article.

31 – It should be noted that paragraph b) of no. 1 of article 116 of the IRS Code even prescribes that amounts delivered by clients for reimbursement of expenses incurred in their name and on their behalf do not influence the determination of income,

32 – A reality that is reinforced by the provision of no. 7 of article 2 of the IRS Code which excluded from the income of a taxpayer the amounts received as provisions or under any other title and intended to cover expenses for which clients were responsible.

33 – Assessment no. 2014..., resulting in tax to be paid of € 3,289.91, suffers from illegality, as provided for in the body of article 99 of the CPPT and, in particular, in paragraph a) of article 99 of the same legal provision, since

34 – It classifies and quantifies as income amounts that do not constitute income, namely the amounts delivered to requester A..., in the year 2013, within the framework of his professional activity, and which constitute provisions, excluded by law from the concept of taxable income.

35 – The illegality practiced by the tax authority is grounds for challenging the assessment in question, in accordance with article 99 of the CPPT, ex vi article 10, no. 2, paragraph c) of Legislative Decree 10/2011, of 20 January.

The authors or requesters did not proceed to the appointment of an arbitrator, whereby, pursuant to the provision of article 6, no. 2, paragraph a), of the RJAT, the undersigned was designated by the president of the Deontological Council of CAAD to compose the present singular Arbitral Tribunal, and accepted this duty in accordance with the legal and regulatory provisions.

On 1-4-2015 the parties were duly notified of this appointment, and did not manifest the will to recuse it in accordance with the combined provisions of article 11, no. 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

The Tribunal was constituted on 17-6-2015 [article 11-1/c), of the RJAT, in the version introduced by article 228, of Law no. 66-B/2012, of 31-12]

On 25-8-2015, the Tax and Customs Authority submitted a response defending that the request for arbitral decision should be judged unfounded and that the tax act challenged should be maintained in the legal order.

It alleged, essentially, that the TA:

a) The Requesters base their claim by raising a single question, namely, the circumstance that the assessment sub judice is based on an erroneous classification and quantification of income earned by the 1st Requester [article 99-a) of the Code of Procedure and Tributary Process], thus violating the provisions of articles 2/2 and 116/1-b) of the IRS Code ("CIRS").

b) The Requesters allege that the 1st Requester, even though placed within the simplified IRS regime, possesses an accounting system that satisfies the requirements appropriate for correct determination and inspection of IRS, since he records, in computerized form, the reimbursement of expenses incurred in the name and on behalf of clients, the provisions received and the expenses incurred (cf. articles 19, 20 and 27 to 29 of the initial petition), which is embodied in Document 8 attached to the initial petition.

c) However, the allegations of the Requesters do not correspond to reality, and naturally, from this lack of correspondence important consequences flow.

d) It is uncontested that the 1st Requester is inserted in the simplified IRS regime.

e) However, it is already disputed that the 1st Requester can claim to possess the accounting system to which article 116/4 of the CIRS alludes.

f) According to that standard, "holders of category B income who, not being required to have organized accounting, nevertheless possess an accounting system that satisfies the requirements appropriate for correct determination and inspection of the tax may not use the books referred to in this article".

g) However, the adoption of this accounting system does not depend only and solely on the will of the taxpayer.

h) In fact, for such adoption to take place it becomes necessary that taxpayers communicate this beforehand to the Respondent: "Taxpayers who, not being required to have organized accounting, possess an accounting system that permits correct determination and inspection of the tax may, when they have previously communicated this to the DGCI, not use the registration books referred to in no. 1."

i) The 1st Requester did not previously communicate to the Respondent his option for an accounting system in detriment to the registration books referred to in article 50/1 of the Value Added Tax Code ("VATA"), ex vi of article 116/1 of the CIRS.

j) Or, if he did so, he does not furnish proof, as was incumbent upon him (article 74 of the General Tax Law ["GTL"]).

j) On the other hand, Document 8 attached to the initial petition does not constitute any accounting system, but only and apparently an Excel spreadsheet to which some data were entered. It is merely an internal document prepared by the 1st Requester himself.

k) Reasons for which Document 8 attached to the initial petition is hereby challenged for all legal purposes.

l) Thus being the case, two conclusions are drawn as to the aforementioned lack of correspondence between what is alleged by the Requesters and what is the reality of the facts: The first is that, in fact, the 1st Requester was (and is) required to record the books referred to in article 50 of the VATA until he communicates beforehand to the Respondent his intention to adopt the accounting system to which article 116/6 of the CIRS alludes; and the second is that the "accounting" used by the 1st Requester, either at the level of records or at the level of supporting documents, does not enjoy the presumption of truthfulness to which article 75/1 of the GTL alludes since, as mentioned, the "accounting" of the 1st Requester is not organized in accordance with tax law (due to the lack of the necessary prior communication), nor can it be considered an accounting system (in the sense that it is merely an Excel spreadsheet).

Regarding the erroneous classification and quantification of income earned by the 1st Requester:

m) As mentioned in the introductory part, the Requesters raise a single question, namely, the circumstance that the assessment sub judice is based on an erroneous classification and quantification of income earned by the 1st Requester, invoking for that purpose, and in summary, the following arguments:

i. The additional assessment in question suffers from illegality because it considers as income resulting from the professional activity of the 1st Requester amounts that do not constitute any income;

ii. The amount of € 9,552.79 which the Respondent considers as income is not in fact income, because these are amounts requested by the 1st Requester from his clients as an advance/provision for expenses that the first had to incur on behalf and in the name of the latter;

iii. As the documents embodied in Document 8 attached to the initial petition prove, the said total amount of € 9,552.79 was intended to cover expenses for which the clients of the 1st Requester were responsible, and not being, therefore, income subject to taxation in the IRS regime.

n) In light of the arguments of the Requesters, the question to be analyzed boils down simply to the following: is the amalgamation of documents embodied in Document 8 attached to the initial petition capable of demonstrating that the total amount of € 9,552.79 recondenses to amounts received as provisions, advances or intended to cover expenses for which the clients of the 1st Requester were responsible?

o) Comparing receipt no. … (issued on 2013-01-23 for the amount of € 400.00) with the respective documents supporting the expense, it is verified that:

· The documents relating to court fees not only do not allow ascertaining any connection between the attorney and the client in question, but nor do they even allow ascertaining any connection between that expense and that client;

· Contrary to what is alleged, there is no document evidencing payment to a bailiff, but rather a document by which an executed party paid to an executing party;

· The total of the expenses amounts to € 277.96, when the alleged provision was € 400.00, resulting in a positive value in favor of the 1st Requester that constitutes taxable income.

p) Comparing receipt no. … (issued on 2013-01-24 for the amount of € 500.00) with the respective documents supporting the expense, it is verified that:

· The total of the expenses amounts to € 2.46, when the alleged provision was € 500.00, resulting in a positive value in favor of the 1st Requester that constitutes taxable income.

q) Comparing receipt no. … (issued on 2013-03-05 for the amount of € 61.20) with the respective documents supporting the expense, it is verified that:

· The first two documents not only do not allow ascertaining any connection between the attorney and the client in question, but nor do they even allow ascertaining any connection between those expenses and that client;

· The fourth document is a certificate concerning client C… (NIF…) and not the client appearing in receipt no. … (C…, Single Member Company, Lda.), that is, we are before two legally distinct persons.

r) Comparing receipt no. … (issued on 2013-05-15 for the amount of € 54.78) with the respective documents supporting the expense, it is verified that:

· The document concerns client F…, Lda., and not the client to which receipt no. … alludes (C…, Single Member Company, Lda.).

s) Comparing receipt no. … (issued on 2013-03-13 for the amount of € 450.00) with the respective documents supporting the expense, it is verified that:

· The document relating to payment of the court fee not only does not allow ascertaining any connection between the attorney and the client in question, but nor does it even allow ascertaining any connection between that expense and that client;

· The total of the expenses amounts to € 226.99, when the alleged provision was € 450.00, resulting in a positive value in favor of the 1st Requester that constitutes taxable income.

t) Comparing receipt no. … (issued on 2013-07-11 for the amount of € 1,000.00) with the respective documents supporting the expense, it is verified that:

· The document relating to the court fee not only does not allow ascertaining any connection between the attorney and the client in question, but nor does it even allow ascertaining any connection between that expense and that client;

· The total of the expenses amounts to € 459.00, when the alleged provision was € 1,000.00, resulting in a positive value in favor of the 1st Requester that constitutes taxable income.

u) Comparing receipt no. … (issued on 2013-07-16 for the amount of € 800.00) with the respective documents supporting the expense, it is verified that:

· The document relating to the court fee not only does not allow ascertaining any connection between the attorney and the client in question, but nor does it even allow ascertaining any connection between that expense and that client;

· The total of the expenses amounts to € 367.00, when the alleged provision was € 800.00, resulting in a positive value in favor of the 1st Requester that constitutes taxable income.

v) Comparing receipt no. … (issued on 2013-07-23 for the amount of € 750.00) with the respective documents supporting the expense, it is verified that:

· The document relating to the court fee not only does not allow ascertaining any connection between the attorney and the client in question, but nor does it even allow ascertaining any connection between that expense and that client;

· The evidence of payment of the court fee is illegible, thus making impossible the exercise of the right to be heard by the Respondent;

· The total of the expenses amounts to € 275.00, when the alleged provision was € 750.00, resulting in a positive value in favor of the 1st Requester that constitutes taxable income.

x) Comparing receipt no. … (issued on 2013-07-23 for the amount of € 500.00) with the respective documents supporting the expense, it is verified that:

· The document relating to the certificate not only does not allow ascertaining any connection between the attorney and the client in question, but nor does it even allow ascertaining any connection between that expense and that client;

· The second document not only does not allow ascertaining any connection between the attorney and the client in question, but nor does it even allow ascertaining any connection between that expense and that client;

· The same second document refers to a publication in a newspaper, but does not indicate any expense;

· The total of the expenses evidenced (namely, the first document) amounts to € 15.00, when the alleged provision was € 500.00, resulting in a positive value in favor of the 1st Requester that constitutes taxable income.

z) Comparing receipt no. … (issued on 2013-09-04 for the amount of € 61.10) with the respective documents supporting the expense, it is verified that:

· It is not demonstrated, as was incumbent, (article 74 of the GTL) that the 1st Requester has even requested the issuance of the alleged third court certificate still lacking, as he claims.

aa) Comparing receipt no. … (issued on 2013-10-04 for the amount of € 40.80) with the respective documents supporting the expense, it is verified that:

· It is not demonstrated, as was incumbent, (article 74 of the GTL) that the 1st Requester has even requested the issuance of the alleged second court certificate still lacking, as he claims.

bb) Comparing receipt no. … (issued on 2013-10-15 for the amount of € 500.00) with the respective documents supporting the expense, it is verified that:

· The first and second documents not only do not allow ascertaining any connection between the attorney and the client in question, but nor do they even allow ascertaining any connection between those expenses and that client;

· The total of the proven expenses (namely, the first document) amounts to € 5.22, when the alleged provision was € 500.00, resulting in a positive value in favor of the 1st Requester that constitutes taxable income;

· In any event, even if all the documents were apt to evidence the expenses incurred, their total value would still be less than the value of the alleged provision, resulting in a positive value in favor of the 1st Requester that constitutes taxable income.

cc) Comparing receipt no. … (issued on 2013-11-17 for the amount of € 1,200.00) with the respective documents supporting the expense, it is verified that:

· The document not only does not allow ascertaining any connection between the attorney and the client in question, but nor does it even allow ascertaining any connection between that expense and that client;

· The total of the expenses amounts to € 612.00, when the alleged provision was € 1,200.00, resulting in a positive value in favor of the 1st Requester that constitutes taxable income.

dd) Comparing receipt no. ... (issued on 2013-11-07 for the amount of € 500.00) with the respective documents supporting the expense, it is verified that:

· The first and second documents not only do not allow ascertaining any connection between the attorney and the client in question, but nor do they even allow ascertaining any connection between those expenses and that client;

· The evidence of payment of the court fee is illegible, thus making impossible the exercise of the right to be heard by the Respondent;

· The document relating to the executive request not only does not allow ascertaining any connection between the attorney and the client in question, but nor does it even allow ascertaining any connection between that expense and that client;

· The total of the expenses amounts to € 125.60, when the alleged provision was € 500.00, resulting in a positive value in favor of the 1st Requester that constitutes taxable income.

ee) Comparing receipt no. ... (issued on 2013-11-07 for the amount of € 500.00) with the respective documents supporting the expense, it is verified that:

· The second and fourth documents not only do not allow ascertaining any connection between the attorney and the client in question, but nor do they even allow ascertaining any connection between those expenses and that client;

· The total of the proven expenses (namely, the first document) amounts to € 2.71 when the alleged provision was € 500.00, resulting in a positive value in favor of the 1st Requester that constitutes taxable income;

· In any event, even if all the documents were apt to evidence the expenses incurred, their total value (€ 16.93) would still be less than the value of the alleged provision (€ 500.00), resulting in a positive value in favor of the 1st Requester that constitutes taxable income.

ff) Comparing receipt no. ... (issued on 2013-12-18 for the amount of € 500.00) with the respective documents supporting the expense, it is verified that:

· The document not only does not allow ascertaining any connection between the attorney and the client in question, but nor does it even allow ascertaining any connection between that expense and that client;

· The evidence of payment of the court fee is illegible, thus making impossible the exercise of the right to be heard by the Respondent;

· The total of the expenses amounts to € 25.50, when the alleged provision was € 500.00, resulting in a positive value in favor of the 1st Requester that constitutes taxable income.

gg) Comparing receipt no. ... (issued on 2013-12-20 for the amount of € 500.00) with the respective documents supporting the expense, it is verified that:

· The document relating to the request for a certificate not only does not allow ascertaining any connection between the attorney and the client in question, but nor does it even allow ascertaining any connection between that expense and that client.

hh) In summary, the amalgamation of documents embodied in Document 8 attached to the initial petition is not capable of demonstrating that the total amount of € 9,552.79 is recondensed into amounts received as provisions, advances or intended to cover expenses for which the clients of the 1st Requester were responsible.

By order issued on 22-10-2015, the hearing provided for in article 18 of the RJAT was dispensed with, as well as the production of witness testimony.

After extension of the deadline for the decision, a foreseeable date for issuance and notification of this decision was set.

Procedural Matters/Presuppositions

The arbitral tribunal was regularly constituted and is materially competent, in light of the provisions of articles 2, no. 1, paragraph a), and 30, no. 1, of the RJAT.

The parties possess legal personality and capacity and are legitimate (articles 4 and 10, no. 2, of the same diploma and article 1 of Ordinance no. 112-A/2011, of 22 March).

The process does not suffer from nullities and no questions have been raised that may hinder the consideration of the merits of the case.

With the instruction of the process closed, it is incumbent to consider and decide the question that is the subject of the proceedings.

II REASONING

The Proven Facts

The judge (or arbitrator) does not have the duty to pronounce on all the matter alleged, but rather has the duty to select only that which is relevant for the decision, taking into account the cause (or causes) of action that grounds the claim(s) formulated by the plaintiff (cf. articles 596, no. 1 and 607, nos. 2 to 4, of the CPC, in the version of Law 41/2013, of 26/6) and to record whether he considers it proven or not proven (cf. article 123, no. 2, of the C.P.T.).

On the other hand, according to the principle of free assessment of evidence, the Tribunal bases its decision, in relation to the evidence produced, on its intimate conviction, formed from the examination and evaluation it makes of the means of proof brought to the proceedings and in accordance with its life experience and knowledge of persons (cf. article 607, no. 5, of the C.Civil, in the version of Law 41/2013, of 26/6). Only when the probative force of certain means is pre-established in law (e.g. full probative force of authentic documents - cf. article 371, of the Civil Code) does the principle of free assessment of evidence not prevail in the assessment of evidence produced.

Having made these preliminary considerations, the Tribunal considers, in light of the foregoing, the following facts to be demonstrated, essential for the decision of the case:

1. On 29 May 2014 the requesters delivered their income tax return for the year 2013, validated by the system with the validation code... . – Doc. 2

2. Requester A... is an attorney by profession, whilst requester B... is a civil servant. – Doc. 2

3. From Annex B, model 3, relating to requester A... appears the professional activity exercised by him – activity 6010 - in accordance with the table of activities contained in article 151 of the IRS Code, which corresponds to attorneys;

4. An activity which the requester exercises, in the regime of liberal profession, under the simplified taxation regime, and from which he presented gross income in the year 2013 of € 58,996.52, resulting from professional services rendered to various entities. – Doc. 2

5. In the exercise of his professional activity and to cover expenses with the services rendered to his clients, the requester finds himself compelled to request certain amounts, which are called and constitute provisions, and which are intended to cover expenses inherent to the services rendered and which are the responsibility of his clients.

6. In the year 2013 requester A... requested from some of his clients amounts intended to cover expenses with the matters entrusted, from which he issued the corresponding receipt

7. In the year 2013 the requester issued electronic receipts corresponding to advances for payment of expenses on account of and in the name of clients in the total amount of € 9,552.79, all reported to the tax administration, through the issuance of electronic receipts, as follows:

1. Requester A... was notified by the Tax and Customs Authority that his income tax return for the year 2013 had been selected for analysis by reason of "The retained amounts on business and professional income declared are higher than those known". - Doc. 3

2. The requester taxpayer was personally present at the Tax Office of Lisbon-..., on 3 July 2014, and provided the requested clarifications, having ascertained that there was an error in his income tax return in the sum of the amounts of tax withheld at source contained in his income tax return of € 12.50. – Doc. 4

3. By official letter dated 17 November 2014 requester A... was notified to exercise his right to prior hearing in light of the Tax Authority's intention to correct the values entered in his income tax return, as follows: - Doc. 5

1. The requester exercised his right to prior hearing, making explicit the origin of his income, accepting the correction to be made in the values indicated as tax withheld at source, - Doc. 6

2. ... and clarifying that the amount of € 9,552.79, which the Tax Authority intended to consider as income, were not in fact income [from the Requester's perspective], but rather amounts requested as advances for expenses that he had to incur on behalf and in the name of clients. – Doc. 6

3. The Tax Authority, with the date of 1 December 2014, 3 days after the exercise of prior hearing, notified the requester that it would proceed to correct, as it did, the income tax return. – Doc. 7

4. From such correction resulted assessment no. 2014..., in the amount of €3,289.91, now under challenge...

5. ... which the Requesters paid on 16-1-2015;

6. Requester A... exercises the professional activity of attorney under the simplified taxation regime and, although not possessing an organized accounting system, possesses an internal and personal system of registration and entry in running account of the amounts received as provisions and the expenses those provisions are intended to cover;

7. The requester separately records the amounts which he receives from his clients and which are intended to cover expenses with the services that these entrust to him;

8. The aforesaid record identifies the expenses covered for clients, which are entered in running account and supported by the documents evidencing the expenses actually incurred. – Doc. 8;

9. The Requester issued the following receipts with the descriptors that follow:

· Receipt ..., in the amount of € 154.92, evidences the amount requested as a provision to cover payment of a court fee and request for a bailiff's provision within the framework of an identified judicial proceeding; - Doc. 8

· Receipt ..., in the amount of € 400.00, evidences the amount requested as a provision to cover payment of court fees and payments to a bailiff within the framework of an identified judicial proceeding and also postal expenses; - Doc. 8

· Receipt ..., in the amount of € 500.00, evidences the amount requested as a provision to cover expenses with a proceeding entrusted, of which by the end of the year 2013 only the amount marked with postal expenses had been spent; - Doc. 8

· Receipt ..., in the amount of € 102.00, evidences the amount requested as a provision to cover payment of two court fees with the institution of an injunction procedure; - Doc. 8

· Receipt ..., in the amount of € 20.40, evidences the amount requested as a provision to cover payment of a court certificate; - Doc. 8

· Receipt ..., in the amount of € 61.20, evidences the amount requested as a provision to cover payment of three court certificates, of which only two had been issued by the end of the year 2013; - Doc. 8

· Receipt ..., in the amount of € 54.78, evidences the amount requested as a provision to cover payment of a bailiff's provision within the framework of an identified judicial proceeding; - Doc. 8

· Receipt ..., in the amount of € 450.00, evidences the amount requested as a provision to cover payment of a court fee and request for a bailiff's provision within the framework of an identified judicial proceeding and postal expenses; - Doc. 8

· Receipt ..., in the amount of € 20.40, evidences the amount requested as a provision to cover payment of a court certificate; - Doc. 8

· Receipt ..., in the amount of € 1,000.00, evidences the amount requested as a provision to cover payment of expenses with a judicial action, having already been made a payment as to an initial court fee; - Doc. 8

· Receipt ..., in the amount of € 800.00, evidences the amount requested as a provision to cover payment of expenses with a judicial action, having already been made a payment as to a court fee; - Doc. 8

· Receipt ..., in the amount of € 750.00, evidences the amount requested as a provision to cover payment of expenses with a judicial action, having already been made a payment as to a court fee; - Doc. 8

· Receipt ..., in the amount of € 500.00, evidences the amount requested as a provision to cover payment of expenses with two judicial actions, having already been issued an honorarium receipt for one of them, in which half of the provision was considered, and the other half used in payment of expenses with the proceeding; - Doc. 8

· Receipt ..., in the amount of € 324.89, evidences the amount requested as a provision to cover payment of part of a court certificate, payment to a bailiff within the framework of an identified judicial proceeding and the court fee owed by the institution of an injunction; - Doc. 8

· Receipt ..., in the amount of € 61.20, evidences the amount requested as a provision to cover payment of three court certificates, of which only two have been issued; - Doc. 8

· Receipt ..., in the amount of € 20.40, evidences the amount requested as a provision to cover payment of a court certificate; - Doc. 8

· Receipt ..., in the amount of € 30.60, evidences the amount requested as a provision to cover payment of part of a court certificate; - Doc. 8

· Receipt ..., in the amount of € 61.20, evidences the amount requested as a provision to cover payment of a court certificate; - Doc. 8

· Receipt ..., in the amount of € 40.80, evidences the amount requested as a provision to cover payment of two court certificates, of which only one has been issued; - Doc. 8

· Receipt ..., in the amount of € 500.00, evidences the amount requested as a provision to cover payment of a court fee with a judicial proceeding, land registry certificate, payment of a bailiff's provision within the framework of an identified judicial proceeding and postal expenses; - Doc. 8

· Receipt ..., in the amount of € 1,200.00, evidences the amount requested as a provision to cover payment of expenses with a judicial proceeding, of which part was used in payment of the court fee; - Doc. 8

· Receipt ..., in the amount of € 500.00, evidences the amount requested as a provision to cover payment of a court fee with a judicial proceeding, land registry certificate, payment of a bailiff's provision within the framework of an identified judicial proceeding; - Doc. 8

· Receipt ..., in the amount of € 500.00, evidences the amount requested as a provision to cover payment of expenses with a judicial proceeding, part of which has been used in payment of certificates and postal expenses; - Doc. 8

· Receipt ..., in the amount of € 500.00, evidences the amount requested as a provision to cover payment of expenses with a judicial proceeding, of which part was used in expenses and the remainder considered as honoraria, with refund to the client of the excess; - Doc. 8

· Receipt ..., in the amount of € 500.00, evidences the amount requested as a provision to cover payment of expenses with a judicial proceeding, part of which has already been used in payment of a court fee; - Doc. 8

· Receipt ..., in the amount of € 500.00, evidences the amount requested as a provision to cover payment of expenses with a judicial proceeding, part of which was used in payment of a certificate and the remainder considered as honoraria, from which a receipt was issued. - Doc. 8

1. From the aforesaid amounts received as provisions for expenses, in a total of €9,552.79, the Requester made actual payments of client expenses, in the year 2013, in the amount of €2,393.84;

2. Requester A... was taxed in IRS in 2013 under the "Simplified Regime" and did not make nor communicate to the Respondent his option for an accounting system in detriment to the registration books referred to in article 50/1 of the Value Added Tax Code ("VATA"), ex vi of article 116/1 of the IRS Code.

Facts Not Proven

It was not demonstrated that:

• the aforesaid amounts received by the Requester as provisions for expenses in the name and on behalf of clients, had been entirely used for that purpose, only the aforesaid amount of €2,393.84 having been so used.

Reasoning

The proof of the facts is based on the critical analysis of the pleadings of the parties, in conjunction with the documents and copy of the administrative instructory process attached to the proceedings, being especially relevant for proof and counter-proof of the imputation of the amount of €9,552.79 in expenses on behalf of and in the name of clients, document no. 8 attached by the Requesters with the initial petition.

From that document it is admitted, in an operation not entirely free from doubts and difficulties, that payments relating to expenses on behalf of clients have been effectively and partially processed or invoiced with the use of provisions or advances, but in a value less than that received.

In fact, analyzing document 8, it can be concluded that the Requester has made or demonstrated the payment of expenses only in the total amount of €2,393.84.

II REASONING (continuation)

The Law

In light of the positions of the Parties taken in the arguments presented, it constitutes, if we understand correctly, the central determining question whether the assessment sub judice is based or not on an erroneous classification and quantification of income earned by the 1st Requester [article 99-a) of the Code of Procedure and Tributary Process], thus violating (or not), the provisions of articles 2/2 and 116/1-b) of the IRS Code ("CIRS").

The question is thus framed, in a simple manner: the Requester, an attorney, subject to the simplified regime (article 28-2 of the CIRS), received, in the exercise of his professional activity and because of it, the amount of €9,552.79 from various clients allegedly intended for payment of expenses on behalf and in the name of those same clients; however the TA contests that imputation and considers it income for purposes of taxation of the couple in IRS for the year 2013, proceeding to the assessment under challenge on the basis of that understanding.

Let us see.

The income earned by whoever exercises, on own account, the professional activity of attorney, is considered professional income and taxed in category B provided for in article 3 of the IRS Code.

Naturally, advances for payment of expenses on behalf and in the name of the client are excluded from inclusion as income (this is an advance made by the client to the attorney for the latter to pay the expenses he will have with his case, e.g. travel, court fees, etc.).

Advanced by the client certain amounts to the attorney for payment of these expenses, the receipt or receipt is issued with that descriptor and without subjection to the taxation proper to professional income. Which obviously they are not.

Currently, in cases where collectible income is not determined according to accounts (SIMPLIFIED REGIME) the amounts received as provisions for expenses are considered as income in the year following that of their receipt if there is no invoicing of the respective service (Cf article 3-7 of the CIRS, as amended by Law no. 82-E/2014, of 31-12).

Amounts received intended for payment of those expenses, the non-taxation of those values as professional income is thus conditioned on subsequent invoicing.

On the other hand and even if the taxpayer, subject to the simplified regime, presents, during an inspection, accounting records, this will only have the virtue of eventually being relevant for determination of taxable profit in the case that the taxpayer has previously opted for the determination of profit by that means (organized accounting) in accordance with the law (Cf articles 28-3, 4 and 5 of the CIRS). It will only and exclusively in this case and under these conditions that the accounting result will enjoy the legal presumption of truth with the consequent burden of proof on the TA of non-correspondence to reality (Cf., e.g., article 75 of the GTL).

Subsumption:

In the case sub judice the option for organized accounting did not occur and the taxpayer was subject to the simplified taxation regime.

He presented proof of receipt of €9,552.79 as provisions or advances from clients for payment of expenses within the framework of their respective service provisions.

However, it being incumbent on him the burden of proving the subsequent application of these advances in actual expenses on behalf of clients, he did not succeed in making that proof or only made it partially, in that it was only demonstrated that there was attributed to those expenses the amount of €2,393.84 corresponding to the sum of the following amounts mentioned in the aforesaid document 8:

[277.96+2.46+226.99+459.0+367.0+275.0+15.0+5.22+612.0+125.0+2.71+25.50]

Therefore, since the application of the difference €7,158.95 [9,552.79-2,393.84) is not demonstrated, this amount must be presumed to constitute professional income and, consequently, subject to taxation in IRS – Category B, in light of articles 1 and 3 of the CIRS.

Thus suffers only, in the measure indicated, partial illegality the assessment under challenge.

Indemnificatory Interest

The Requesters seek reimbursement of the tax improperly assessed and paid, together with indemnificatory interest, at the legal rate.

The Requesters paid the assessed amount, as referred to in point 15 of the statement of proven facts.

In accordance with the provision of paragraph b) of article 24 of the RJAT the arbitral decision on the merits of the claim as to which no appeal or challenge lies binds the tax administration from the expiration of the deadline provided for the appeal or challenge, and this administration must, in the exact terms of the success of the arbitral decision in favor of the taxpayer and until the expiration of the deadline provided for the spontaneous execution of the sentences of the tax courts, "reestablish the situation that would exist if the tax act that is the subject of the arbitral decision had not been practiced, adopting the acts and operations necessary for that purpose", which is in keeping with the provision of article 100 of the GTL [applicable by force of the provision of paragraph a) of no. 1 of article 29 of the RJAT] which establishes that "the tax administration is obliged, in the case of total or partial success of a claim, judicial challenge or appeal in favor of the taxpayer, to the immediate and full reestablishment of the legality of the act or situation that is the subject of the dispute, including the payment of indemnificatory interest, if applicable, from the expiration of the deadline for execution of the decision".

Although article 2, no. 1, paragraphs a) and b), of the RJAT uses the expression "declaration of illegality" to define the competence of the arbitral tribunals that function in CAAD, making no reference to condemnatory decisions, it should be understood that the powers that in judicial challenge proceedings are attributed to tax courts are comprised within its competences, and this is the interpretation that is in keeping with the sense of the legislative authorization upon which the Government based itself to approve the RJAT, in which it proclaims, as a first guideline, that "the tax arbitral process must constitute an alternative procedural means to the judicial challenge process and to the action for recognition of a right or legitimate interest in tax matters".

The judicial challenge process, despite being essentially a process for annulment of tax acts, admits the condemnation of the Tax Administration for payment of indemnificatory interest, as is apparent from article 43, no. 1, of the GTL, in which it is established that "indemnificatory interest is due when it is determined, in gracious reclamation or judicial challenge, that there was error attributable to the services from which results payment of the tax debt in amount greater than that legally due" and from article 61, no. 4 of the CPPT (in the version given by Law no. 55-A/2010, of 31 December, to which corresponds no. 2 in the original version), that "if the decision that recognized the right to indemnificatory interest is judicial, the period for payment is counted from the beginning of the period for its spontaneous execution".

Thus, no. 5 of article 24 of the RJAT in saying that "payment of interest is due, regardless of its nature, in accordance with the terms provided in the general tax law and in the Code of Procedure and Tributary Process" should be understood as permitting recognition of the right to indemnificatory interest in arbitral proceedings.

In the case at hand, it is manifest that, as a consequence of the partial illegality of the assessment act, there is grounds for refund of the tax, by force of the aforesaid articles 24, no. 1, paragraph b), of the RJAT and 100 of the GTL, since this is essential to "reestablish the situation that would exist if the tax act that is the subject of the arbitral decision had not been practiced", in the part corresponding to the correction that was considered illegal.

With regard to indemnificatory interest, it is also clear that the illegality of the act is attributable to the Tax and Customs Administration, which, on its own initiative, practiced it without legal support.

We are faced with a defect of violation of substantive law, embodied in error in the legal presuppositions, attributable to the Tax Administration.

Consequently, the Requesters have the right to indemnificatory interest, in accordance with article 43, no. 1, of the GTL and article 61 of the CPPT, calculated on the amount that they improperly paid.

Thus, the Tax and Customs Authority must give execution to this decision, in accordance with article 24, no. 1, of the RJAT, determining the amount to be refunded to the Requesters and calculating the respective indemnificatory interest, at the legal supplementary rate for civil debts, in accordance with articles 35, no. 10, and 43, nos. 1 and 5, of the GTL, 61 of the CPPT, 559 of the Civil Code and Ordinance no. 291/2003, of 8 April (or diploma or diplomas that succeed it).

Indemnificatory interest is due from the date of payment (16.1.2015), until that of the processing of the credit note, in which it is included (article 61, no. 5, of the CPPT).

III – DECISION

Proceeding, in accordance with the foregoing, the partial illegality of assessment no. 2014..., relating to IRS for the year 2013, in the amount of € 3,289.91, to the extent that it considered, for such assessment, professional income the amount in excess of €7,158.95, is hereby annulled in that measure, the tax act in question.

Furthermore, the Tax and Customs Authority is condemned to refund to the Requesters the difference between the amount of the assessment [€3,289.91] and that resulting from the new assessment arising from this annulment, with payment of indemnificatory interest, at the legal rates in effect, on that difference, from 16-1-2015 until the preparation of the respective credit note by the Tax and Customs Authority.

Value of the Proceedings

In accordance with the provision of article 306, no. 2, of the CPC and 97-A, no. 1, paragraph a), of the CPPT and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at € 3,289.91.

Costs

In accordance with article 22, no. 4, of the RJAT, the amount of costs is fixed at € 612.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, in the proportion of 80% by the Requesters and 20% by the Tax and Customs Authority.

Lisbon, 16 January 2016

The Arbitrator,

(José Poças Falcão)