Process: 227/2018-T

Date: November 5, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 227/2018-T) addresses the procedural consequences when the Portuguese Tax Authority (AT) revokes an IRS assessment during pending arbitration proceedings. The taxpayer challenged IRS assessment no. 2017... for the 2015 tax year, which assessed €3,542.19 in tax. After paying €3,604.15 (including default interest and costs) through enforcement proceedings in April 2017, the taxpayer filed for arbitration in May 2018. During the arbitration, the AT annulled the contested assessment and subsequently refunded the amounts paid. The tribunal ruled that this revocation and refund created supervening uselessness of the dispute (inutilidade superveniente da lide), as continuing the proceedings would serve no practical purpose. Following Portuguese Civil Procedure Code article 277(e), when facts occurring during proceedings eliminate the interest and utility of litigation, extinction is warranted. The tribunal emphasized that supervening uselessness occurs when the objective sought by the claimant is achieved through alternative means during the pendency of proceedings, rendering judicial decision futile. This case establishes important precedent regarding when CAAD arbitration must be dismissed due to voluntary AT revocation of assessments, even when taxpayers have already paid contested amounts through enforcement. The decision confirms that complete satisfaction of the taxpayer's claim through administrative revocation and refund eliminates the need for judicial determination of the assessment's legality.

Full Decision

ARBITRAL DECISION

I – REPORT

  1. A..., married, taxpayer number ..., resident at ..., nº..., in Lisbon (hereinafter referred to as the Claimant or Taxpayer), filed on 2018-05-03 a request for the establishment of a single arbitral tribunal, in accordance with the provisions of paragraph a) of no. 1 of article 2, no. 5, paragraph 2, letter a), article 6 no. 1 and article 10, nos. 1 and 2, all of Decree-Law no. 10/2011, of 20 January (hereinafter referred to as RJAT), in which the Tax and Customs Authority is cited as respondent (hereinafter referred to as Respondent or TA), with a view to declaring the illegality and consequent annulment of the decision dismissing the administrative claim to which the number ...2017... was assigned, as well as declaring the illegality and consequent annulment of the Personal Income Tax (IRS) assessment act, no. 2017..., relating to the year 2015.

  2. The request for establishment of the Single Arbitral Tribunal was accepted by His Excellency the President of the CAAD and notified to the Respondent on 2018-05-10.

  3. In accordance with the provisions of paragraph a) of no. 2 of article 6 of the RJAT, by decision of His Excellency the President of the Deontological Council of the CAAD, duly notified to the parties within the prescribed timeframes, the undersigned was appointed as arbitrator and communicated acceptance of the appointment to that Council within the timeframe provided in article 4 of the Deontological Code of the Centre for Administrative Arbitration.

  4. On 2018-06-25, the parties were notified of this appointment and did not manifest any intention to challenge the arbitrator's designation, in accordance with the combined provisions of article 11, no. 1, paragraphs a) and b) as amended by Law no. 66-B/2012, of 31 December.

  5. The Single Arbitral Tribunal was constituted on 2018-07-16, in accordance with the requirement of paragraph c) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December.

  6. Duly notified for this purpose, through an order dated 2018-07-16, the Respondent filed its response on 2018-09-04, and on the same date attached the administrative proceedings to the file.

  7. In its response, the TA, alleging that the assessment act subject to the present arbitral decision was "annulled, with the sums owed already being reimbursed," requested, consequently, the extinction of the proceedings due to supervening inutility of the dispute.

  8. As a result of an arbitral order dated 2018-09-04, the Claimant stated on 2018-09-14 that "since the tax and accrued amounts paid in the course of the tax enforcement proceedings have not been reimbursed, the present proceedings cannot be extinguished due to supervening inutility of the dispute."

  9. The TA was invited to make a statement within ten days regarding the Claimant's assertion concerning the non-occurrence of the reimbursement of the tax and accrued amounts, and on 2018-09-27 requested an extension to make such statement.

  10. This extension was granted to it by an order dated 2018-09-27.

  11. On 2018-10-16, the TA provided documentary proof of the reimbursement to the Claimant of the amounts in question.

  12. By an arbitral order dated 2018-10-16, the date for rendering the decision and its notification to the parties was set.

  13. The Single Arbitral Tribunal is materially competent and is regularly constituted in accordance with articles 2, no. 1, paragraph a), 5 and 6 of the RJAT.

  14. The parties have legal standing and capacity, are entitled to proceed and are duly and legally represented (articles 3, 6 and 15 of the Code of Tax Procedure and Process, by virtue of article 29, no. 1, paragraph e) of the RJAT).

  15. The proceedings do not suffer from any nullities.

II – GROUNDS

A. MATTERS OF FACT

A.1. Facts Established as Proven

With relevance to the assessment of the question submitted for the tribunal's decision, the following facts are established as proven:

(i) on 16 August 2016, the Claimant and his spouse submitted their Model 3 IRS declaration for the year 2015, with the option for joint taxation regime,

(ii) in this declaration all income obtained abroad by the household during the period of partial tax residence in Portuguese territory (from 20-01-2015 to 31-12-2015) was declared,

(iii) the Claimant was notified of the IRS assessment for the year 2015 – Assessment no. 2017... – in the amount of €3,542.19,

(iv) on 20 March 2017, the Claimant filed an administrative claim against the aforementioned 2015 IRS assessment with a view to its annulment,

(v) on 11 April 2017, the Claimant made payment of the assessed tax plus default interest and procedural costs in the amount of €3,604.15 in the course of tax enforcement proceedings no. ...2017...,

(vi) in its response the TA informed that the assessment, subject to the request for arbitral decision, had been annulled,

(vii) on 2018-10-16 the TA informed and provided documentary proof of the reimbursement of the tax subject to the contested assessment.

A.2. Facts Established as Not Proven

With relevance to the decision, there are no facts that should be considered as not proven.

A.3. Reasoning regarding the Matters of Fact Established as Proven and Not Proven

With respect to the matters of fact, the tribunal is not required to pronounce on everything alleged by the parties, but rather has the duty to select the facts that matter for the decision and to distinguish the proven from the unproven matters (cf. article 123, no. 2 of the CPPT and article 607, no. 3, applicable by virtue of article 29, no. 1, paragraphs a) and e) of the RJAT).

In this manner, the facts relevant to the judgment of the case are selected and delimited according to their legal relevance, which is established in light of the various plausible solutions of the legal question(s) (cf. article 596 of the CPC, applicable by virtue of article 29, no. 1, paragraph e) of the RJAT).

Thus, taking into account the positions assumed by the parties in light of article 110, no. 7 of the CPPT, the documentary evidence and the attached administrative proceedings, the aforementioned facts are established as proven, with relevance to the decision.

B. MATTERS OF LAW

The subject matter of these proceedings consists of the 2015 Personal Income Tax assessment act no. 2017..., which established the IRS to be paid in the amount of €3,542.19.

As results from the facts established as proven, (vi) and (vii), by means of an order issued by the TA, all tax acts subject to the present proceedings were revoked.

In light of what occurred, the continuation of the present dispute becomes futile, inasmuch as its continuation will not result in any effect on the disputed material legal relationship, with the parties, moreover, being in agreement on this point.

Indeed, supervening inutility of the dispute occurs when, by virtue of a fact occurring during the pendency of the proceedings, the solution of the litigation ceases to have interest and utility, which justifies extinction (cf. article 277, paragraph e) of the Code of Civil Procedure).

As emphasized by Lebre de Freitas, João Redinha, Rui Pinto [1], the supervening inutility or impossibility of the dispute "occurs when, by virtue of a fact occurring during the pendency of the instance, the plaintiff's claim cannot be maintained by virtue of the disappearance of the subjects or object of the proceedings, or is satisfied outside the scheme of the relief sought. In either case, the solution of the litigation ceases to matter – in the former, by impossibility of achieving the intended result; in the latter, because it has already been achieved by another means."

Thus, if, by virtue of new facts occurring during the pendency of the proceedings, the objective sought with the claim presented in court has already been achieved by another means, then the decision to be rendered does not involve any useful effect, and therefore supervening inutility of the dispute occurs in this context.

It follows from the administrative actions established as proven that the claim formulated by the Claimant, which aimed at the declaration of illegality and annulment by this Tribunal of the challenged acts was prejudiced inasmuch as the suppression of those acts and their effects in the legal order was achieved by another route after the institution of the proceedings. In fact, the subsequent execution of the express act of revocation of the contested assessments (cf. article 79, no. 1 of the LGT) implies that the proceedings concerning the appraisal of the legality of those assessments is extinguished due to supervening inutility of the dispute, given that, by virtue of their effects being eliminated by the annulling revocation, the appraisal of the alleged defects in order to establish their invalidity loses utility in relation to such assessments, and the challenge claim against them becomes without object.[2]

In this sense, among others, and while by way of example, one may refer to decisions of the Supreme Administrative Court of 02/07/2014 and 29/03/2017, reported respectively by Counsellors Pedro Delgado and Francisco Rothes in proceedings 0713/14 and 0229/16, from which the following is extracted: "I. Supervening inutility of the dispute occurs when, by virtue of a fact occurring during the pendency of the instance, the solution of the litigation ceases to have any interest and utility, thereby leading to the extinction of the proceedings (article 287, paragraph e) of the Code of Civil Procedure)," and as to the latter of the cited decisions: "I. Supervening inutility of the dispute is only verified if, after the institution of the case, the claim for judicial protection formulated therein ceased to have utility, namely because it was obtained by another means [cf. article 277, paragraph e) of the CPC]."

In these terms, this Single Arbitral Tribunal finds that there is supervening inutility of the dispute with respect to the request for annulment of the tax acts subject to the present proceedings, which implies the extinction of the corresponding proceedings in accordance with the provisions of article 277, paragraph a) of the CPC, applicable by virtue of article 29, no. 1, paragraph e) of the RJAT.

III. COMPENSATORY INTEREST

The Claimant concludes his request for the condemnation of the TA to payment of "compensatory interest at the legal rate, from the date of payment until full reimbursement."

Article 43, no. 1 of the General Tax Law (LGT) provides that: "Compensatory interest is due when it is determined in an administrative claim or judicial challenge that there was an error imputable to the authorities resulting in payment of the tax debt in an amount exceeding what is legally owed."

Thus the entitlement to such interest depends on the verification of three requirements: (i) the existence of an error in a tax assessment act imputable to the authorities, (ii) verification of such error in the course of an administrative claim or judicial challenge, and (iii) payment of a tax debt in an amount exceeding what is legally owed.

Article 100 of the aforementioned legal provision further provides that "The tax authorities are obliged, in case of total or partial success of administrative claims or appeals or of judicial proceedings in favor of the taxpayer, to immediately and fully restore the situation that would have existed had the illegality not been committed, including the payment of compensatory interest, in accordance with the terms and conditions provided by law."

Indeed, as no. 5 of article 24 of the RJAT determines that "payment of interest, regardless of its nature, is due in accordance with the provisions of the general tax law and the Code of Tax Procedure and Process," the same should be interpreted to permit recognition of the right to compensatory interest in tax arbitral proceedings.

Compensatory interest serves a reparatory function for the damage, damage that results from the fact that the taxpayer has been unlawfully deprived of a certain amount for a determined period of time, aiming to place him in the situation in which he would have been had he not made the payment that was wrongfully required of him.

In the present case, there remain no doubts concerning the imputability of the error, determining payment and compensatory interest to the Tax and Customs Authority, as acknowledged moreover by that authority in the reimbursement of the amount of tax wrongfully paid.

IV. DECISION

In light of the foregoing, this Single Arbitral Tribunal decides as follows:

a. to declare the proceedings extinct with respect to the request for declaration of illegality of the Personal Income Tax assessment acts and reimbursement of the amounts paid, due to supervening inutility of the dispute, in accordance with the provisions of articles 277, paragraph e) of the Code of Civil Procedure, applicable by virtue of article 29, no. 1, paragraph e) of the RJAT.

b. to absolve the Tax and Customs Authority from the proceedings.

c. to uphold the request for condemnation of the Tax and Customs Authority to payment of compensatory interest from the date of payment until full reimbursement.

d. to condemn the Tax and Customs Authority to pay the costs of the proceedings in the amount set forth below.

V. VALUE OF THE PROCEEDINGS

In accordance with the provisions of articles 296, nos. 1 and 2 of the Code of Civil Procedure, approved by Law no. 47/2013, of 26 June, article 97-A, no. 1, paragraph a) of the Code of Tax Procedure and Process, and article 3, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is set at €3,542.19 (three thousand, five hundred forty-two euros, nineteen cents).

VI. COSTS

In accordance with the provisions of articles 12, no. 2, and 22, no. 4 of the RJAT, and articles 2 and 4 of the Regulation of Costs in Tax Arbitration Proceedings, and Table I attached hereto, the amount of costs is set at €612.00 (six hundred twelve euros).

NOTIFY THE PARTIES

Text prepared by computer, in accordance with article 131 of the Code of Civil Procedure, applicable by cross-reference to article 29, no. 1, paragraph e) of the Legal Regime of Tax Arbitration, with blank verses, and reviewed by the arbitrator.

[The drafting of this decision is governed by spelling prior to the 1990 Orthographic Agreement, except with respect to transcriptions made.]

Fifth of November, two thousand and eighteen.

The Arbitrator

(José Coutinho Pires)

[1] Code of Civil Procedure annotated, volume 1, 2nd edition, Coimbra Editora, 2008, p. 555.

[2] The position expressed herein, data venia, follows what was stated in the course of proceedings no. 431/2017-T of the CAAD with which we identify ourselves without reservation.

Frequently Asked Questions

Automatically Created

What happens when the Portuguese Tax Authority revokes an IRS assessment during arbitration proceedings at CAAD?
When the Portuguese Tax Authority revokes an IRS assessment during CAAD arbitration proceedings, the arbitration typically must be dismissed due to supervening uselessness of the dispute (inutilidade superveniente da lide). Once the AT annuls the contested assessment and refunds all amounts paid by the taxpayer, including the original tax, default interest, and procedural costs, the arbitration loses its practical purpose. The tribunal cannot render a useful decision because the taxpayer's objective—elimination of the tax burden—has already been achieved through administrative means. However, the refund must be complete and documented before the tribunal will dismiss the case.
What is supervening uselessness of proceedings (inutilidade superveniente da lide) in Portuguese tax arbitration?
Supervening uselessness of proceedings (inutilidade superveniente da lide) in Portuguese tax arbitration occurs when facts arising during the pendency of arbitration eliminate the interest and utility of continuing the litigation. Under Article 277(e) of the Portuguese Code of Civil Procedure, applicable to tax arbitration through RJAT Article 29, proceedings are extinguished when the plaintiff's claim is satisfied outside the judicial process. In tax arbitration at CAAD, this typically happens when the Tax Authority voluntarily revokes the contested assessment and refunds all amounts paid, making a judicial decision on the assessment's legality unnecessary and without practical effect on the parties' legal relationship.
Are taxpayers entitled to compensatory interest (juros indemnizatórios) when an IRS tax assessment is annulled by the Tax Authority?
Taxpayers may be entitled to compensatory interest (juros indemnizatórios) when an IRS assessment is annulled by the Tax Authority, particularly if the assessment was illegal or if there was delay in refunding amounts paid. However, this specific decision does not fully address the compensatory interest issue, as it focuses on the procedural extinction of the case due to the AT's voluntary revocation and refund. Compensatory interest is governed by Article 43 of the General Tax Law (LGT) and is typically due when the State illegally retains taxpayer funds. To claim such interest, taxpayers should specifically request it in their administrative claim or arbitration petition, as it constitutes an independent claim that may survive even after the principal assessment is revoked.
Can a CAAD arbitration case be dismissed if the Tax Authority annuls the contested IRS assessment but fails to refund the tax paid?
A CAAD arbitration case cannot be dismissed for supervening uselessness if the Tax Authority annuls the contested IRS assessment but fails to complete the refund of tax paid. In Process 227/2018-T, when the AT initially claimed the assessment had been annulled and amounts reimbursed, the taxpayer contested that no refund had occurred. The tribunal then ordered the AT to prove the reimbursement within ten days, granting an extension when requested. Only after the AT provided documentary evidence of the actual refund on October 16, 2018, did the tribunal proceed with dismissal. This establishes that mere annulment of the assessment is insufficient—complete restitution of all amounts paid (tax, interest, and enforcement costs) must be documented before the arbitration can be extinguished for inutilidade superveniente.
What is the procedure for claiming a refund of IRS tax and accrued interest paid through enforcement proceedings after an assessment is revoked?
After an IRS assessment is revoked by the Tax Authority, taxpayers who paid through enforcement proceedings should receive an automatic refund of all amounts paid, including the principal tax, default interest (juros de mora), and procedural costs. The refund process is typically handled administratively by the AT's tax services. If the refund is not automatically processed, taxpayers should contact the local tax office (Serviço de Finanças) and request immediate reimbursement, providing proof of payment and notification of the assessment's revocation. If administrative channels fail, taxpayers can maintain or initiate arbitration proceedings at CAAD specifically to compel the refund, as demonstrated in this case where the tribunal required documented proof of reimbursement before dismissing the arbitration. Taxpayers may also claim compensatory interest (juros indemnizatórios) for the period during which the State retained funds following an illegal assessment.