CAAD 245/2015-T: IRS Challenge on Foreign Income Withholding Tax Credit Denial for French Life Insurance

ARBITRAL DECISION

CAAD: Tax Arbitration

Case No. 245/2015-T

Subject Matter: Personal Income Tax (IRS), challenge to Personal Income Tax assessment No. 2014…, based on disregard of claimed withholdings relating to income earned abroad

I – STATEMENT OF CLAIM

A… and B…, taxpayers respectively No. … (Passive Subject A) and … (Passive Subject B), (hereinafter "Claimants"), having been notified of Personal Income Tax assessment No. 2014…, relating to the tax year 2010, in the amount of € 26,464.70, hereby submit, pursuant to the terms and conditions set out in paragraph (a) of Article 2, Section 1, and Articles 15 et seq., all of Decree-Law No. 10/2011 of 20 January ("Legal Regime for Tax Arbitration"), a REQUEST FOR ARBITRAL RULING against said Personal Income Tax assessment, which they do on the following grounds:

I – STATEMENT OF FACTS

I.1 – Facts

The Claimants were fiscal residents in France until 2006, and moved to reside in Portugal from 2007 onwards.

In 2011, they duly submitted an initial Personal Income Tax declaration, form 3, for the year 2010, and subsequently, on 14 November 2013 (see doc. 1), submitted an amended declaration, in which they included an Annex G, wherein they declared the paid transfer of corporate shareholdings, and also two Annexes J, as they had earned income from capital of foreign source, in the amounts, respectively, of € 121.00 (Field 408) and € 34,334.92 (Field 423), which were not subject to withholding in Portugal (see Annex 1).

The disputed issue relates precisely to one of those capital income items, earned in France and relating to a life insurance policy, in the total amount of € 85,837.79, subject to taxation in France by withholding at source in the amount of € 6,437.79 (see doc. 2).

According to the Claimants, they declared the income corresponding to only two-fifths of its respective value, amounting to € 34,334.92, as required by the Personal Income Tax Code, under penalty, in their view, of subjecting to taxation an amount that by law is expressly excluded, and they also declared the aforementioned value of tax paid abroad, in the amount of € 6,437.79, as per the statement from Banque Populaire (see doc. No. 2).

The Claimants were notified on 28 November 2013 by the Tax Authority for exercise of the right to a hearing regarding alleged inaccuracies in the amended declaration, because, according to the Tax Authority, the withholding at source declared as having been effected in France was not duly substantiated (see doc. 3).

The Claimants responded by exercising their right to a hearing on 10 December 2013, clarifying that the withholding at source on the aforementioned declared income, derived from a life insurance policy, was effected by Banque Populaire, as per doc. 3, and therefore they understood that the divergence proceedings should be cancelled (see doc. 4).

Subsequently, the Claimants were again notified on 24 October 2014 to exercise anew their right to a hearing regarding corrections to the income and amounts declared in Field 4, Field 423 of Annex J, which should be amended as follows:

(see doc. 5)

The Claimants responded in a timely manner, reaffirming their arguments and the grounds which they believed supported their position (see doc. 6).

They emphasize that the Tax Authority maintained its position, and therefore the Claimants were notified on 18 November 2014 of the final decision maintaining the proposed corrections (see doc. No. 7).

In light of the rejection decision, the Claimants were notified on 16 December 2014 of Personal Income Tax assessment No. 2014…, in the amount of € 27,203.58, and of the statement of account settlement, which determined a balance due for Personal Income Tax in the amount of € 26,464.70 (see docs. Nos. 8 and 9).

I.2 – Applicable Law Invoked

A – Procedural Illegalities Committed by the Tax Authority

The Claimants invoke the following three alleged procedural illegalities committed by the Tax Authority, each of which, in their view, warrants annulment of the contested act.

A.1 – Violation of the Right to Prior Hearing – New Grounds on Which There Was No Participation

The Claimants accuse the Tax Authority of, throughout the administrative procedure preceding the contested assessment, having "resorted to peremptory and enigmatic statements in order not to recognize to the Claimants the classification of the declared income and the right to benefit from the tax credit for tax paid in France".

And, specifically, they note that in the first notification made to them, the Tax Authority argued that "withholdings declared on income obtained abroad by Passive Subject A were unsubstantiated" (see doc. No. 2), with the Tax Authority having made no consideration of the clarifications provided to them by the Claimants and of the documents submitted.

And that in the second notification for exercise of the right to a hearing, the Tax Authority services proposed the disregard of the withholding at source of the French tax that applied to the declared income of € 34,334.92, proposing, moreover, a correction to that income to € 85,837.92, "without providing for that purpose any justifying reason whatsoever".

And they also emphasize that there was no reference on the part of the Tax Authority to the documentation submitted, nor to the arguments raised by the Claimants, in which they justified the declared value.

In the notification made by the Tax Authority to the Claimants communicating the maintenance of the proposed corrections, it was stated by the Tax Authority, "for the first time, that it is not possible to classify the income in question within one of the provisions set forth in the Convention concluded by Portugal and France for purposes of granting a tax credit, and, pursuant to Article 23 of the Convention, that elements of income of a resident of one of the States, not expressly mentioned in the preceding articles, may only be taxed in that State (in Portugal), provided they are subject to tax therein" (see doc. No. 6).

And because they only became aware of this ground in the final decision, the Claimants had no opportunity to express themselves or react to it, which constitutes "a manifest violation of the principle of participation, provided for in Article 60 of the General Tax Law (hereinafter GTL), in particular in Section 3 thereof, which requires a new hearing when new facts are invoked upon which the taxpayer has not yet pronounced".

And they refer to the jurisprudence of the judgment of the Southern Administrative Court, rendered on 13 November 2014, in case No. 07564/14, from which they cite a passage in this regard, highlighting the following part: "The failure to hold a prior hearing of the taxpayer, in the cases provided for in Article 60, Section 1 of the General Tax Law, constitutes a procedural defect capable of leading to annulment of the decision that may be rendered".

And they emphasize that in fact they were not given the opportunity to pronounce themselves on the argument of the impossibility of classifying the income within the Convention concluded between Portugal and France, on the two occasions they were notified to exercise their right to a hearing regarding the correction to the income, which they understand is "something astonishing and which clearly demonstrates the completely chaotic manner in which the present assessment was made".

Whereby they understand that the assessment should be annulled for violation of the principle of due decision-making.

A.2 – Violation of the Right to Prior Hearing – Failure of the Tax Authority to Rule

The Claimants invoke that the Tax Authority, having not "ruled on the requests for exercise of the right to a hearing submitted by them, are equally violating expressly Section 7 of Article 60 of the General Tax Law, which stems from the constitutional principle of participation in decision-making".

And they again refer to the jurisprudence of the Southern Administrative Court, now citing the Judgment rendered on 17 October 2013, in case No. 5354/12, quoting some passages thereof, namely the following: "A decision is not adequately reasoned when it merely states, regarding the new questions and arguments raised by the taxpayer during the prior hearing, that 'in light of the elements sent and after analysis it is to maintain the corrections made'".

And they also cite the jurisprudence of the Supreme Administrative Court, in a Judgment rendered on 24 October 2014, in case No. 0548/12, according to which "Under pain of the right to a hearing becoming an innocuous ritual, upon which lies absolute indifference to the arguments and documents submitted by the taxpayer, there is a requirement for their analysis by the administration, in order to make evident that the decision of the procedure results from a transparent consideration of the elements of fact and law submitted for its appraisal".

And, therefore, the Claimants conclude that the failure to rule on the arguments invoked and on the documents submitted by them, "determines that the assessment decision should be annulled because there is also at issue a violation of the principle of participation, as provided for in Section 7 of Article 60 of the GTL".

A.3 – Violation of the Duty of Reasoning

The Claimants further allege that the conduct of the Tax Authority constitutes a clear violation of Article 36 of the Tax Procedure Code (hereinafter "TPC"), pursuant to which notifications shall always contain, in particular, the decision and the grounds, meeting the legal duty of reasoning to which this entity is bound.

And they again cite the jurisprudence of Judgment No. 065/09 of 15 April 2009 of the Supreme Administrative Court, from which they extract that the legal duty of reasoning should "allow the interested parties knowledge of the reasons that led the administrative authority to act, in order to enable them a conscious choice between acceptance of the legality of the act and its contentious challenge".

And because the Tax Authority made no effort to respect the legal duty of reasoning, there is nothing left but to conclude, in their view, that the Personal Income Tax assessment they challenge is manifestly illegal.

And to reinforce their argument they give as an example that an additional Personal Income Tax assessment is not properly reasoned when the explanation provided refers only to:

"the classification of the income in question within one of the provisions set forth in the Convention concluded by Portugal and France for purposes of granting a tax credit, and, pursuant to Article 23 of the Convention, that elements of income of a resident of one of the States, not expressly mentioned in the preceding articles, may only be taxed in that State (in Portugal) provided they are subject to tax therein" (see doc. No. 6)

And they refer to the "string of words" of the entity that committed the act – The Head of the Finance Services of Lisbon … – which suggests that they had no idea of the reasoning that could underlie the assessment, which, the Claimants emphasize, by not allowing the reasoning to know why of the assessment, such act should be annulled for the defect of failure to reason.

And to reinforce they refer to what is provided in the Judgment of the Central Administrative Court of 28 December 2012, Case No. 04893/11, from which they transcribe an excerpt.

A.4 – Substantive Defects Vitiating the Assessment

The Claimants again refer to the income declaration submitted for the year 2010, to the amounts earned of € 85,837.79 relating to a life insurance product, to the withholding at source of € 6,437.79 that applied to them, and the amounts declared in Annex J of two-fifths of that income value, in the amount of € 34,335.79, by virtue of the provision in paragraph (b) of Section 3 of Article 5 of the Personal Income Tax Code (PITC).

The Claimants contest that the Tax Authority applies differently the norm cited in paragraph (b) of Section 3 of Article 5 of the PITC to income of this nature (derived from redemption of life insurance policies) earned in Portugal and to income earned in other States of the European Union, in this case France, since the norm does not distinguish the source of the income, and, therefore, the contested assessment violates the provision in the norm referred to.

A.4 – Tax Credit for International Double Taxation

Nor do they agree with the disregard of the withholding that the income was subject to in France, because Section 1 of Article 81 of the PITC does not make, in their view, the granting of the tax credit dependent on the classification of the income within any of the income items provided for in the agreement to avoid double taxation concluded by Portugal.

More they understand that this tax credit is due independently of there being an agreement to avoid double taxation or the income being classifiable within an international convention of that nature, as results, in their view, unequivocally, from Section 1 of Article 81 of the PITC, save for the limitation provided in Section 2 of the referred Article 81 of the PITC.

And they emphasize that in the Agreement concluded between Portugal and France there is no limitation established, as follows from Section 1 of Article 12 of the referred Agreement, when it states that "interest arising in one Contracting State and paid to a resident of the other Contracting State may be taxed in that other State".

The Claimants refer the classification of the income in question to the provision in Section 3 of Article 12 of the respective Agreement, as considers the French State, pursuant to Section 1 of the referred article of the Agreement.

And, therefore, they do not agree with the classification of the income in question made by Portugal that qualifies them as capital, rather than interest.

The Claimants refer to the following comments of the OECD Convention:

"When, by reason of differences existing between the internal law of the source State and the residence State, the former applies to a particular element of income or property provisions different from those that would have been applied by the residence State to the same element of income or property, the income does not cease to be taxed in accordance with the provisions of the Convention in accordance with the interpretation and application thereof made by the source State. Therefore, in this case, the two Articles [Articles 23-A and 23-B of the OECD Model Convention, relating to the method of elimination of double taxation] require that the residence State grant relief from double taxation, notwithstanding the conflict of qualification resulting from these differences between national legislations" (cf. Model Tax Convention on Income and on Capital – Condensed Version, 2005, pp. 425)

Whence, the Claimants emphasize, "the withholding at source that occurred in France could never be disregarded, and the claimants have a right to the tax credit for international double taxation".

And they emphasize that if the Tax Authority had any doubts, it could have resorted to the mechanism of information exchange, as provided for in the Convention concluded with France and in accordance with the Directive on Information Exchange – which it did not do.

A.5 – Undue Guarantee

Because they provided a bank guarantee to suspend the execution proceeding underlying the contested assessment, they request compensation for undue provision of guarantee, pursuant to Section 2 of Article 171 of the TPC and Article 53 of the GTL, since they allege there was error attributable to the tax assessment services.

II – RESPONSE OF THE TAX AUTHORITY AND CUSTOMS AUTHORITY

A – Preliminary Question – Lack of Absolute Material Jurisdiction of the Arbitral Tribunal to Recognize the Right of the Claimants to Payment of Compensation for Undue Provision of Guarantee

Based on the provision in paragraph (a) of Section 1 of Article 2 and Article 4 of the Legal Regime for Tax Arbitration (LRTA) and in the Tax Authority Binding Ordinance No. 112-A/2011 of 22 March, the Respondent deduces that "the appraisal of matters relating to the execution proceeding, within which the guarantee provided is encompassed, is not covered within the scope of the material jurisdiction of the Arbitral Tribunal".

And that, therefore, it understands that the arbitral tribunal is incompetent ratione materiae to appraise the claim of the Claimant, insofar as it relates to the fiscal execution proceeding, namely the compensation for guarantee.

And it cites, to reinforce its thesis, Arbitral Case No. 17/2012-T of 14 May 2012, as well as Case No. 175/2013-T of 16 January 2014, which adopt the understanding of the Respondent.

And because the jurisdiction of the Arbitral Tribunal is inscribed within the scope of the review of the legality of assessment acts, the incompetence of the Tribunal to know of the compensation for guarantee provided constitutes, according to the Respondent, a dilatory exception of knowledge ex officio that determines dismissal of the action. Pursuant to Article 576 and paragraph (a) of Article 577 of the Code of Civil Procedure (CCP), applicable by virtue of Article 29, Section 1, paragraph (e) of the LRTA, which it requests.

In any case and as a precaution, in the Respondent's words, it refers to the provisions of Articles 53 of the GTL and 171 of the TPC.

And they cite the provision in Sections 1 and 2 of the cited Article 53 of the GTL:

Section 1:

"The debtor who, to suspend execution, offers a bank guarantee or equivalent shall be compensated in whole or in part for the losses resulting from its provision, should it maintain it for a period exceeding three years in proportion to the lapsing in administrative appeal, challenge or opposition to execution that have as their object the debt guaranteed".

Section 2:

"The period referred to in the preceding number does not apply when it is verified, in a gracious claim or judicial challenge, that there was error attributable to the services in the tax assessment".

And because in the Respondent's view no error attributable to the services in the tax assessment in question was verified, inasmuch as the law did not provide for objective liability, but liability linked to the fault of the services and this fault – by way of intent or negligence – must be alleged and proven, and cannot result, according to the Respondent, automatically from any illegality.

And the Respondent explains that "the duty to compensate does not result immediately and automatically from annulment of the act, being only due when it is determined that there was error attributable to the services".

And the Respondent understands that, "in the case at hand, there is no existence of any error attributable to the services in the issuance of the contested assessment, whereby the request of the Claimant for any compensation for undue provision of guarantee is without merit for lack of foundation".

Given the nature of this alleged lack of material jurisdiction of the Arbitral Tribunal, the Tribunal shall render a decision preliminary to the decision on the object of the main cause of action, which is the Personal Income Tax assessment act of the year 2010.

B – Facts

The Respondent begins by repeating the facts described by the Claimants, whereby the Tribunal is dispensed from repeating them.

However, it emphasizes that by official notice of 16 November 2013, the Claimant a… was notified, for purposes of prior hearing, that the value corresponding and declared as tax paid in the amount of € 6,437.79, would be removed, due to lack of substantiating documents issued by the tax entity of the country in question – France, PA fls. 7.

Because the Claimant only submitted a photocopy of a document issued by "Banque Populaire Val de France", without any substantiating nature, according to the Respondent, although they were sent to the Directorate of Services for Personal Income Tax (DSIRS) for purposes of their evaluation and substantiating quality of the tax paid abroad.

In response, the DSIRS expressed itself to the effect that the documentation submitted "was unclear as to the nature of the income paid by Banque Populaire Val de France, from which resulted the impossibility of its classification and, consequently the qualification of its fiscal nature, being thus to apply residually what is determined in Article 23 of the Convention between Portugal and France to avoid double taxation (CDT)", which it cites:

"determines that provision that elements of income of a resident of one of the States, not expressly mentioned in the preceding articles, may only be taxed in that State (in Portugal), provided they are subject to tax in accordance with the respective fiscal legislation. When a convention determines that taxation is exclusive to the residence State (Portugal), there is no place for the granting of a tax credit by the residence State" – See PA fls. 26.

In light of the conclusions of the DSIRS and what is determined by the CDT, the services concluded in the sense of correcting field 423 of the declaration form 3, including all the earned income of € 85,837.26, as well as correcting to "zero" the tax allegedly paid abroad, because taxation is exclusive to the residence State and because no tax credit is provided for in the Law regarding Article 23 of the CDT.

Having granted a new right to a hearing to the Claimants, although unnecessarily according to the Respondent, but nothing resulted from it, according to the Respondent, of any new element of adequate proof, whereby they were notified of the correction that the Tax Authority would proceed to in Annex J of the declaration form 3 of Personal Income Tax of the year 2010 and that they could appeal graciously or contentiously after notification of the assessment – which occurred on 16-12-2014.

C – Law – Regarding the Alleged Procedural Illegalities Committed by the Tax Authority

C1 – Regarding the Alleged Violation of the Right to Prior Hearing – the New Grounds on Which There Was No Participation

Contrary to what is alleged by the Claimants regarding the use by the Tax Authority of peremptory and enigmatic phrases to refuse to recognize to the claimants the classification of the income and the right to benefit from the account of tax paid in France (see art. 25 of the PI – hereinafter ppa), the Respondent understands that the procedure carried out has always been marked by legality and transparency.

And it recalls that in the notification for prior hearing made by the Respondent regarding the inaccuracies detected, it stated the following: "withholdings declared on income obtained abroad by Passive Subject not substantiated through documents issued by the respective tax authority of the country. The value of € 6437.79 of withholdings will be removed from Annex J of Passive Subject A"" (see fls. 7 of PA).

And the Respondent refers to Article 74 of the GTL, regarding the burden of proof, which falls on whoever invokes the right, in the case the Claimant, the exposition presented being irrelevant regarding the claimed validity of the document issued by "Banque Populaire".

And because no new facts were invoked by the Claimants, there was no place for a new prior hearing, as provided in Section 3 of Article 60 of the GTL, whereby, in the Respondent's view, there was no violation of the right to prior hearing.

On the other hand, it also understands that the alleged violation of the principle of due decision-making, enshrined in Article 52 of the Constitution and also in Article 56 of the GTL, does not hold, inasmuch as the administration not only decided, but validly notified the passive subject of its decision.

C2 – Regarding the Alleged Violation of the Right to Prior Hearing – Failure of the Tax Authority to Rule

Regarding the alleged failure to rule on the requests submitted by the Claimants, the Respondent refers to the following excerpt from the notification made to them on the same, to prove that there was also no failure to rule by the Tax Authority here:

"On 2014.10.03, entry No. 2014…, was sent to this Finance Service, e-mail from DSIRS-DL, in order to effect the correction of the value inscribed in field 423 of annex J, relating to the SPA whose income should be € 85,837.29, and tax paid abroad € 0.0, since it is not possible to classify the income in question within one of the provisions set forth in the Convention concluded between Portugal and France, for purposes of granting a tax credit, and, pursuant to Article 23 of the Convention, that elements of income of a resident of one of the States not expressly mentioned in the preceding articles, may only be taxed in that State (in Portugal), provided they are subject to tax therein".

And regarding the applicability to the case of the jurisprudence of the Judgments invoked by the Claimants, the Respondent also sees no failure to rule, inasmuch as, in its view, no notifications exist with content similar to "in light of the elements sent and after analysis it is to maintain the corrections made".

C3 – Regarding the Alleged Violation of the Duty to Reason the Assessment

The Respondent responds, in this regard, that, on the one hand, and pursuant to Article 37 of the TPC, the failure to invoke its insufficiency, within the legal period provided therein, leads to its cure, provided the reasoning is contemporary with the tax act in question, as happened in the case at hand.

But the Respondent understands that the reasoning of the tax act in question meets all the requirements of Section 2 of Article 77 of the GTL, because it results from its content, clearly, expressly and congruently, which are the facts and law reasons that motivated the corrections made and the consequent additional tax assessment.

And this because, in light of Article 23 of the CDT between Portugal and France, the tax credit of € 6,437.79 could only be considered if the competent material proof was presented, constituted in a legally valid manner through the aforementioned Tax Certificate issued by the Tax Authority/Fiscal Authority of France, Claimants not being able to claim to justify the fiscal credit with documents that were not validly issued.

Whence, the Respondent concludes, "the provision of Article 77 of the GTL or Article 125 of the CPA was in no way violated".

C4 – Regarding the Alleged Substantive Defects Vitiating the Assessment

The Respondent clarifies that the arguments made by the Claimants lead to understanding that they either did not understand or did not accept that what is truly at issue is the impossibility of recognizing the nature of the declared income in Annex J, due to lack of material proof with a view to its fiscal qualitative recognition, "being this the molecular issue" that should be recognized in a first phase.

Whence, according to the Respondent, "there remains the possibility of its residual qualification within the scope of Article 23 of the CDT Portugal/France, from which could emerge the desired fiscal credit in the amount of € 6,437.79, if, to that end, we reiterate, the competent material proof was presented, constituted in a legally valid manner through the aforementioned Tax Certificate issued by the Tax Authority/Fiscal Authority of France".

However, as no adequate proof was presented, as was its responsibility pursuant to Article 74 of the GTL, and as follows from the cited jurisprudence of the Judgment of the Administrative Court of the North in case 00434/09.5BEMDL, cited.

Whereby it cannot be concluded that there is any error committed by the Tax Authority in its respective assessment.

D – Regarding the Alleged Tax Credit for International Double Taxation

The Respondent responds to the repudiation of the disregard of the withholding at source that took place in France on the income earned there, highlighting that, "with regard to income tax, the criterion chosen by the generality of member states, to define in which situations they would have competence to tax a particular fact, was the criterion of residence".

It refers to the provision in Article 13 of the GTL, regarding universal taxation of income earned by residents in Portuguese territory, regardless of the location of the source, without prejudice, however, to the application of international conventions of which Portugal is a party and save for any provision to the contrary contained in them.

Thus, in light of the law in force in the Portuguese State, it follows from Article 81 of the PITC then in force, regarding the "Elimination of economic double taxation", the following:

"1. The holders of income of the different categories obtained abroad have the right to a tax credit for international legal double taxation, deductible up to the amount of the portion of the tax calculated before the deduction, corresponding to income earned abroad, net of deductions, which corresponds to the lesser of the following amounts:

a) Income tax paid abroad;

b) Fraction of the Personal Income Tax calculated before deduction, corresponding to income that in the country in question may be taxed, net of the specific deductions provided for in this Code.

1. When there exists a convention to eliminate double taxation concluded by Portugal, the deduction to be made pursuant to the preceding number cannot exceed the tax paid abroad as provided for in the convention".

The Respondent emphasizes that, because a CDT concluded between Portugal and France is in force, which prevails over internal law, it is necessary to respect the conventional provisions, both as to the qualification of income earned in France, and as to the granting of credit for elimination of double taxation, where applicable, and as to the competence attributed to the States in question to tax the income.

And it emphasizes that the CDTs establish in their Article 23 or 24 the provisions to eliminate double taxation, referring to the methods applied by the internal legislation of each of the contracting States, recalling that there is the exemption method, according to which the residence State renounces taxation, the allocation method or the method of credit, pursuant to which a tax credit will be granted, as provided in Section 2 of Article 24, except if pursuant to the CDT the source State cannot tax, that is, if taxation is exclusive to the residence State.

The Claimants qualify the income earned in France as being "interest", then making the entire legal framework around it, and state that if the Tax Authority had doubts it should resort to the mechanism of information exchange, "completely reversing the burden of proof, when Article 74 of the GTL expressly imposes that whoever invokes facts must prove them".

The Respondent, regarding all this problem, cites a long excerpt from the text of the Judgment 0434/09 of 22-02-2012 of the Administrative Court of the North, which is given here as reproduced, but from which is highlighted, in summary, the provision in Article 81, Section 2 of the PITC regarding the prevalence of CDTs over internal law, of the need for proof, on the part of whoever has the burden of proof - the Claimants, that tax was paid (in this case in France) on the income earned there, it not being legitimate to reverse the burden of proof by requiring the Tax Authority to use the mechanism of information exchange.

Whereby, the Respondent concludes that the claims formulated by the Claimants lack merit.

III – ARGUMENTS OF THE CLAIMANTS

III.1 – OF THE CLAIMANTS

The Claimants begin by highlighting what they call "a veil of confusions" in the Response given by the Respondent, justifying it by the fact that it begins by stating that "what is at issue in the case is the proof of the tax paid in France on income earned there" and subsequently also state that, after all, "what is truly at issue in the present proceeding, is rather, first and foremost, the impossibility of recognizing the nature of the income in question, due to lack of probative material with a view to its fiscal qualitative recognition, and this is the molecular issue that should be recognized in a first phase".

Moreover, they highlight the invocation by the Respondent of the incompetence of the Arbitral Tribunal to appraise the right to compensation for undue guarantee, resorting to arbitral jurisprudence that bears no relation whatever to the subject matter of discussion.

They also highlight the Respondent's doubts regarding the proof made by the Claimants of the income earned in France, when they come to recognize its existence and the quantitative amount of that same income.

Finally, they highlight the erroneous application of the various principles and concepts that are structural to conventions to avoid international double taxation and in particular that concluded between Portugal and France and the applicability of the Personal Income Tax Code.

Let us then turn to the concrete arguments:

Absence of Documentary Proof Presented by the Claimants

The Claimants find strange the alleged absence of documentary proof, both regarding the nature of the income and as to the withholdings at source, inasmuch as they attached to the case (doc. No. 2) a letter issued on 14 January 2010 by "Banque Populaire Val de France", in which it details:

• the gross amount of € 300,337.29 of the reimbursement corresponding to the life insurance that they had subscribed;

• the amount of € 85,837.29 relating to the income obtained by them; and

• the amount of € 6,437.79 of the withholdings at source suffered as a final tax.

More they allege that they attached the following documents (Nos. 10 and 11) demonstrating that the said life insurance policy:

• Had the commercial designation of "Fructi-Selection Vie 2",

• Had been subscribed on 20 November 2001 and

• Was established with an initial capital (investment) in the amount of € 213,427.50.

Whence the Claimants do not understand the alleged lack of proof, inasmuch as the authenticity of the documents presented and issued by "Banque Populaire" was never questioned.

More they emphasize that if the documents were issued by a Portuguese insurance company, the Tax Authority would have no doubt in accepting them. And, therefore, there cannot be discrimination in treatment, under pain of violation of the basic principles of European Union law and Article 8 of the Constitution.

Furthermore, the requirement by the Tax Authority of documents of "official source" is not based on any legal provision that imposes it, from the CDT between Portugal/France to the Personal Income Tax Code itself.

They cite, namely the Judgment of the Supreme Administrative Court of 20 April 2005 (case No. 124/04), according to which, in an identical case, although regarding dependent labor income, it is concluded that "…The law does not stipulate a binding system of proof…", which is also corroborated by the understanding expressed by Rui Duarte Morais (in "Double Taxation in Personal Income Tax – Notes from a Reading in Jurisprudence, Review of Public Finance and Tax Law, No. 1, Year I, April 2008, p. 123"), when referring that "the proof of the facts in question can be achieved by other means than the presentation of certain 'forms' (although – we add – the nature of things seems always to require a document)".

The Claimants characterize the attitude of the Tax Authority as caricatural and perverse, in that they accept, on the one hand, the declaration of the income as reliable, but refuse to accept the declaration of the tax withheld at source on that same income, even when it is documented proof.

They emphasize that the criterion did not result from the CDT Portugal/France, nor from the Personal Income Tax Code, but from the doctrine of Circular Notice No. 20022 of 19 May 2000, in which it is established that in cases of income obtained abroad susceptible to benefit from internal or conventional provisions on international double taxation "…proof documents should be required regarding the amount of income, its nature and the payment of tax, which should be issued or authenticated by the Tax Authorities of the respective State from which the income originates (…)".

And regarding the nature and value of these administrative instructions, designated "circulatory law", the Claimants refer to the Manual of Tax Law, 3rd Edition, pp. 73 of JJ Saldanha Sanches, as well as the identical Manual of Alberto Xavier and still to the Judgment of the Supreme Administrative Court of 16 January 2008 (case No. 381/07), which, in general, all go in the sense that these are instructions that do not directly bind the taxpayers nor the Courts, but only the Tax Administration and its officials, due to lack of normative value.

Whence, the Claimants conclude that "although the Claimants are obligated to prove the constitutive facts of their right to benefit from the tax credit for international double taxation, they did not have the duty to provide the Tax Administration with any document in which all the requirements that it made a point of setting forth in the aforementioned Circular Notice No. 20022 of 19 May 2000 were reunited".

More they emphasize that they were not obligated to such proof nor were they in a position to satisfy it, as is demonstrated by the answer given by the French Fiscal Administration to a letter addressed to it aimed at the certification of income earned and withholding effected, given the imposition of the Tax Authority.

To which was responded by them that the "French tax authorities cannot issue a certificate of tax payment. In the redemption of life insurance, Banque Populaire sent a letter detailing a summary of the reimbursement amount and the various amounts withheld. It is necessary to provide the Portuguese tax authorities with a copy of that letter to justify the amounts charged in France by the banking organization that managed your contract".

And they then cite an excerpt from the Judgment of the Supreme Administrative Court of 20 April 2005 (case No. 1254/04), from which it is extracted that "…if the passive subject is unable to present a document issued by the German Tax Authority evidencing that payment, it is sufficient for the deduction the presentation of a statement from the employer entity, where the withholdings effected appear, as well as payment receipts".

Whence, the Tax Authority not having managed to demonstrate which legal requirements legitimated its conduct, in considering invalid the documents presented by the Claimants, and having done nothing, officially, to substantiate them, the requirement of "impossible to obtain documents" to benefit from the tax credit violates the CDT in force between Portugal/France and is unconstitutional, due to violation of Article 8 of the Constitution.

Nature of the Income Obtained by the Claimants

The Claimants do not understand that despite all the documentation carried to the tax procedure and to the present case and the income and value of the withholding that they inscribed in Annex J to the declaration form 3, the Respondent alleges not to recognize the nature of the income in question, due to impossibility entirely attributable to the Claimant (see Article 91 of the Response).

And, therefore, they find strange that despite the documentation attached, namely that issued by "Banque Populaire", the Respondent doubted that it concerned income relating to a life insurance policy, as they underlined in the two requests submitted.

And for better clarification, the Claimants request, in this position of Arguments, the attachment, under the principle of free conduct of the proceeding (Article 19 of the LRTA) and the inquisitorial principle (Article 114 of the TPC and Article 99 of the GTL, applicable by virtue of Article 29 of the LRTA), a copy of the following document:

• "Contrat d'assurance de Groupe sur la Vie" (Life Insurance Contract) which they concluded with "Banque Populaire Val de France" (see doc. No. 2);

• "Respective Statement" - which evidences the annual evolution of the same, from subscription to the moment of redemption (see doc. No. 3).

Considering, thus, proven that in 2010 they earned the amount of € 85,837.79, relating to income from the initial capital invested of € 213,427.50 (see doc. 11) in the said life insurance policy, and on which (income) the withholding at source of € 6,437.79 was applied (see doc. No. 2).

Whence, based on the provision in Section 3 of Article 5 of the PITC and paragraph (b) of the same Section 3 (which they transcribe), they declared 2/5 of the respective value of the income earned upon redemption, that is, € 34,335.92.

And they conclude by affirming that any different treatment will be arbitrary and discriminatory with regard to "Life" insurance and violative of European Union law and Article 8 of the Constitution.

Disrespect for the Principle of Participation Expressed in Article 60 of the GTL

In this regard, the Claimants recall what is provided in Article 60 of the GTL, also citing the Judgment of the Supreme Administrative Court of 15 October 2008, case No. 0542/08, as well as, regarding new facts, DIOGO LEITE DE CAMPOS, BENJAMIM SILVA RODRIGUES AND JORGE LOPES DE SOUSA, in General Tax Law Annotated and Commented, 4th Edition, 2012, p. 427.

And this because, as they allege, the Tax Authority limited itself to "pretending" that it granted the right to prior hearing to the Claimants, given the conduct it had in the various phases of the procedure.

The Tax Authority notified the Claimants to state that withholdings were declared on income obtained abroad by Passive Subject A unsubstantiated, but after the explanations provided to it, the Tax Authority, without any justification, ignored them and proposed the disregard of the withholding at source, taking the opportunity to further propose a new correction to the declared income.

They further allege that in the exercise of the right to a hearing for the second time for clarification of the situation, the Tax Authority again chose to completely ignore the documentation presented by the Claimants, limiting itself to notifying them of the decision to maintain the proposed corrections.

More they emphasize that only in the third notification did the Tax Authority state for the first time that the correction in question was due to the fact that it is not possible to "classify the income in question within one of the provisions set forth in the Convention concluded between Portugal and France, for purposes of granting a tax credit, and, pursuant to Article 23 of the Convention, that elements of income of a resident of one of the States, not expressly mentioned in the preceding articles, may only be taxed in that State (in Portugal), provided they are subject to tax therein" (see doc. No. 6).

And they clarify that on this new ground they were not given the opportunity to express themselves, as the Tax Authority itself recognizes in its Articles 65 and 66 of the Response.

Which determined that they could not pronounce themselves before the final decision to make corrections to the income and withholdings declared by them.

And because the facts invoked by the Respondent are new, they argue that the provision in Section 3 of Article 60 of the GTL required them to be notified for purposes of prior hearing, in consonance also with the jurisprudence of the Judgment of the Southern Administrative Court of 13 November 2014, case No. 07564/14, from which they cite an excerpt.

Whence they conclude that this failure to notify for purposes of prior hearing constitutes a procedural defect capable of leading to annulment of the decision that may be rendered.

Existence or Not of a Defect of Failure to Rule by the Tax Authority

Regarding the invoked failure to rule by the Tax Authority on the facts and proof presented to it, the Respondent responds that "The Tax Authority informed the Claimant because of what reason it would carry out the corrections pursuant to Section 4 of Article 65 of the PITC" (see Article 76 of the Response) and also that "The Tax Authority in possession of the documentation remitted by the Claimant, understood that it was not sufficient to clarify the nature of the income within one of the provisions of the CDT" (see Article 77 of the Response).

The Claimants do not so understand, sustained in the jurisprudence of the Judgments of the Southern Administrative Court rendered on 17 October 2013, in case No. 05354/12 and in the Judgment of the Supreme Administrative Court of 24 October 2014, in case No. 0548/12, in the same sense of the requirement of analysis by the Tax Authority of the documents submitted to it, under pain of the right to a hearing becoming an innocuous ritual.

And hence the conclusion of the Claimants in the sense that the referred paragraph that is contained in document No. 6 attached to the PI, "corresponds effectively to the reasoning of the assessment act (and, as such, the Claimants should have had the opportunity to pronounce themselves thereon), or this paragraph reasons nothing (and the assessment is illegal due to lack of reasoning and lack of ruling by the Tax Authority on new elements)".

Omission (or Not) of Reasoning for the Corrections and Assessments Challenged

On this problem of the defect of lack of reasoning, the Tax Authority understands that there was no violation, attending to the fact that it results from the procedure in question "which are the facts and law reasons that motivated the corrections made and the consequent additional tax assessment".

The Claimants do not agree, in light of the provision in Article 77, Sections 1 and 2 of the GTL, which they transcribe, and in light of Article 268 of the Constitution, reinforcing with excerpts from the doctrine of MÁRIO ESTEVES DE OLIVEIRA, PEDRO COSTA GONÇALVES AND J PACHECO DE AMORIM, in Annotated Code of Administrative Procedure, 2nd Edition, 2006, p. 589, as well as from MARCELO CAETANO, in Manual of Administrative Law, Vol. I, p. 477 and still from FREITAS DO AMARAL, in Course of Administrative Law, Vol. II, 2nd Edition, 2011, p. 387, in which all confirm the indispensability of reasoning as the foundation of administrative legality, and, therefore, with the indispensability of the exposition of the reasons that led to the practice of the act in that manner and not in another, with that content.

They also cite on this matter VIEIRA DE ANDRADE, DIOGO LEITE DE CAMPOS, BENJAMIM SILVA RODRIGUES AND JORGE LOPES DE SOUSA, previously cited, according to whom, summarily and respectively, reasoning "requires a necessary explicit reflection and consideration of the reasons and arguments in confrontation…", and "should consist of a brief exposition of the facts and law grounds that motivated the decision (…), under pain of there being obscurity (…) and even "insufficient reasoning (…)".

And because, in the Claimants' view, that did not occur, they conclude that the additional Personal Income Tax assessment is not properly reasoned, because the aforementioned doc. 6 of the Tax Authority attached to the case does not meet these requirements, since "it does not in any way explain the legal basis followed by the Tax Administration to reach the decision it arrived at".

And because it is also not presented clearly, sufficiently and congruently, as would be necessary, in accordance with the Judgment of the Central Administrative Court of 28 February 2012, in case No. 04893/11, which it cites, the reasoning made must be considered insufficient and defective for lack of reasoning.

On the other hand, regarding the invoked cure of this defect by the Respondent, by virtue of the period provided in Article 37 of the TPC, the Claimants counter with the jurisprudence of the Supreme Administrative Court, in the Judgment of 6 June 2007, case No. 155/07, cited by JORGE LOPES DE SOUSA, in ANNOTATED AND COMMENTED TPC, Áreas Publishing, 6th Edition, Volume I, p. 367, according to which "The regime provided for in Article 37 of the TPC relates to deficiencies in notifications of tax acts and not to deficiencies in the acts themselves being notified".

And because the defect did not occur due to deficient notification, there is no place here for cure, whereby they understand that the assessment act should be annulled.

Applicability of Tax Credit for International Double Taxation

The Claimants, in light of the position of the Tax Authority on this matter, in which they allege "there would be no place for the granting of a tax credit, being the responsibility of the source State the elimination of double taxation" (see Article 110 of the Response), develop, based on the various applicable provisions in confrontation, of the PITC and the CDT concluded between Portugal and France, their theory of interpretation of the applicable provisions and the hierarchy thereof, arriving at a conclusion to the contrary.

In fact, they invoke, on one hand, the prevalence of the hierarchy of applicable Conventional provisions, as provisions of International Law, namely Articles 24, Section 2 and Sections 1 and 2 of Article 12, in contrast with the provision of internal law in Section 2 of Article 81 of the PITC, which yields before the provisions of the CDT cited.

They emphasize that in light of Sections 1 and 2 of Article 12 of the CDT, "(…) interest arising in one Contracting State (in this case France) and paid to a resident of the other Contracting State (in this case Portugal), may be taxed in that other State (Portugal), without prejudice to the first-mentioned State (in this case France) being able also to tax that income (albeit within certain limits)".

Whence they emphasize that the competence to tax is cumulative and that, therefore, in light of the provision in Section 3 of Article 12 of the CDT, the term "interest" designates "the income from public debt, bonds with or without mortgage guarantee and with or without the right to participate in profits and credits of any nature, as well as any other income assimilated to the income from amounts loaned by the fiscal legislation of the State from which the income originates".

And the source State considers as "interest" the income derived from life insurance policies, having applied withholding at source thereon, within the scope of the tax competencies granted to it, pursuant to the cited Section 1 of Article 12 of the CDT.

And that in light of Articles 23-A and 23-B of the OECD Model Convention, they also understand that Portugal, even if it does not qualify in this manner the interest in question, these cannot fail to be taxed as such by the source State and that Portugal cannot fail to grant relief from double taxation, pursuant to Section 2 of Article 24 of the CDT.

Recourse to the Mechanism of Information Exchange by the Tax Authority

Regarding the refusal of the Tax Authority to use the mechanism of information exchange, the Claimants refer to the provision in Article 58 of the GTL, according to which "The Tax Administration must, in the proceeding, perform all necessary diligences for the satisfaction of the public interest and the discovery of material truth, not being subordinated to the initiative of the party requesting".

And citing doctrine in this same sense, they understand that the Tax Authority should have activated the mechanism of information exchange with the French tax authorities, in conformity with Article 27 of the CDT concluded between Portugal and France.

They also cite the Judgments of the Administrative Court of the North of 14 April 2005 (cases Nos. 107/03 and 285/02), of 28 April 2005 (case No. 190/02), of 14 July 2005 (case No. 89/03), in which it is expressed that "the Portuguese Tax Administration is competent, in the case of subsisting doubts regarding the coincidence between the amount withheld at source and the tax assessed, to proceed to the exchange of information with the tax authorities (…), in order to avoid double taxation (…)".

The same is understood by RUI DUARTE MORAIS, as well as DIOGO LEITE CAMPOS, BENJAMIM SILVA RODRIGUES and JORGE LOPES DE SOUSA (in cited work, p. 488), from which it is extracted that the fact that the Tax Administration did not develop, throughout the tax proceeding, all the diligences that were within its reach to comply with the principle of inquisitorial investigation, translates into a defect that is capable of "implying the annulment of the decision taken".

By all that has been stated and in the remaining doctrine and jurisprudence cited, in the same sense, the Claimants understand that it is evident that the Tax Authority has no reason to dispense with information exchange and that, therefore, in disrespecting the provision of Article 27 of the CDT, the Personal Income Tax assessment now challenged suffers from the defect of illegality, which determines its full annulment.

AA – THE EXCEPTION FOR LACK OF JURISDICTION OF THE ARBITRAL TRIBUNAL RATIONE MATERIAE

The Claimants clarify that to the request for payment of compensation for undue provision of guarantee (see doc. No. 4), pursuant to Section 2 of Article 171 of the TPC and Article 53 of the GTL, the Respondent invokes the existence of a dilatory exception for lack of jurisdiction of the arbitral tribunal ratione materiae, affirming that the arbitral tribunal does not have jurisdiction for the "appraisal of matters relating to the execution proceeding, within which the guarantee provided is encompassed" (see Article 8 of the Response).

The Claimants understand, as to this question, that "there is a clear mistake committed by the Tax Authority, inasmuch as, as expresses Article 24, Section 1 of the LRTA, the arbitral decision on the merits of the claim, which is not subject to appeal, binds the Tax Authority to, in particular, review the tax acts that are in a relationship of prejudiciality or dependence with the tax acts subject to arbitral decision, namely by being inscribed within the scope of the same tax relationship, even if corresponding to different periodic obligations, altering or replacing them, in whole or in part".

More they argue the following: "Now, if this Tribunal comes to determine that the contested assessment is illegal, one of the effects of such decision will be the determination of a duty of the Tax Administration to compensate, in conformity with the TPC and GTL, the Claimants because the Claimant was forced to provide, in an undue manner, a guarantee aimed at the suspension of the execution proceeding".

And to clarify any existing doubts, they refer to "the teachings expressed, clearly, by Judge Counselor JORGE LOPES DE SOUSA in Commentary on the Legal Regime for Tax Arbitration, Guide to Tax Arbitration, Coord. NUNO VILLA-LOBOS and MÓNICA BRITO VIEIRA, Almedina, 2013".

And by this Author it is also stated that "the recognition of rights and legitimate interests in tax matters, outside the cases in which may underlie the declaration of legality of acts or appraisal of the questions indicated in Section 1 of Article 2 of the LRTA, is outside the jurisdiction of the arbitral tribunals" (cited work, p. 105, with emphasis of the Claimants).

And more is highlighted by the same author that the Tax Authority is bound by the jurisdiction of the arbitral tribunals, pursuant to Ordinance No. 112-A/2011 of 22 March, as regards the "appraisal of all claims of the taxpayers connected with assessment acts, self-assessment acts, withholding at source acts and payment on account acts that have as their object taxes which it administers" (cited work, p. 115, with emphasis of the Claimants).

And they also cite JORGE LOPES DE SOUSA, cited work, pp. 112 and 113, which states that "within its jurisdiction the arbitral tribunals have the powers that in judicial challenge proceedings are attributed to the tax tribunals in relation to the cases whose legality appraisal is inscribed within their jurisdiction".

And, finally, to reinforce what was previously stated, they cite the arbitral jurisprudence contained in the arbitral decisions of 15 September 2014 (case No. 197/2014-T) and 8 January 2015 (case No. 409/2014-T).

For which reason the dilatory exception invoked by the Respondent must necessarily fail.

AB – CONCLUSIONS

The Claimants present in their arguments, in revision, Conclusions on all the matters discussed, terminating by affirming that:

The Tax Authority and Customs Authority should be condemned to payment of compensatory interest and also to payment of compensation for undue guarantee;

The defenses by exception and by challenge invoked by the Tax Authority in its Response cannot be adjudged to have merit.

III.2 – OF THE RESPONDENT

From the arguments presented, the Tribunal highlights the following aspects considered relevant, noting that the Respondent maintains in full the content of its Response, which is summarized as:

It contests entirely the arguments of the Claimants, which in its view deliberately distort reality, with reflection on the legal framework established for the appraisal of the facts.

It reaffirms that the issue that arises is that of qualifying the nature of the income paid in France, for purposes of application of the Convention to avoid double taxation concluded between Portugal and France.

Another issue is that of the defect of violation of the right to a hearing, the duty to reason and the defect of violation of law by error in the interpretation of law and its application to the facts.

As regards the matter of dilatory exception, it reiterates the same, reaffirming that the request for compensation for provision of undue guarantee is not inscribed within the scope of the jurisdiction of the arbitral tribunals.

As regards the matter of fact that it considers of interest to the case, it maintains as valid for purposes of probative all the documents attached.

And it recalls the Personal Income Tax declaration of the Claimants, therein having declared in Annex J, in field 423, the income € 34,334.92 and the tax paid of € 6,437.79.

More it alleges that Claimant A… was notified by official notice of 23-11-116 that he had declared withholdings on income obtained from abroad unsubstantiated by documents issued by the respective tax authority of the country, whereby the value of the withholdings declared of € 6,437.79 in Annex J to the income declaration would be removed from him.

Regarding the Right to a Hearing

It alleges that in that notification of 16-11-2013, he was granted the right to a hearing and that in response he did not present the documents issued by the tax entity of the country in question, to substantiate the tax paid.

The Respondent alleges that, in response, a simple photocopy of a document issued by an entity called "Banque Populaire Val de France" was presented by the Claimant, which the Tax Authority sent to the Directorate of Services for Personal Income Tax (DSIRS) for evaluation of its quality and validity.

To which the DSIRS responded that the documentation presented "was unclear as to the nature of the income paid by Banque Populaire Val de France, from which resulted the impossibility of its classification, and consequently the qualification of its fiscal nature, being thus to apply residually what is determined in Article 23 of the Convention between Portugal and France to avoid double taxation (CDT), citing":

"determines that provision that elements of income of a resident of one of the States, not expressly mentioned in the preceding articles, may only be taxed in that State (in Portugal), provided they are subject to tax in accordance with the respective fiscal legislation. When a convention determines that taxation is exclusive to the residence State (Portugal), there is no place for the granting of a tax credit by the residence State".

It was in light of this response from the DSIRS that the Tax Authority proceeded to correct the value of the declared income and withholding, altering that from € 34,334.92 to € 85,837.29 and disregarding in their entirety the value of the withholding effected in France of € 6,437.79.

The Respondent highlights that, by lapse, the Services proceeded to a new notification on 22-10-2014, for purposes of the right to a hearing of the draft correction, repeating the Tax Authority the same grounds of the intended correction.

To this notification the Claimant again responded, in the same terms as he did previously.

The Respondent highlights, as proof of what is alleged, that, in accordance with documents presented by the Claimants with their arguments, only in October 2015 did they make diligences with the French tax authorities, in the sense of attending to what was requested by the Tax Authority, that is, in the sense of substantiating income and withholdings with documents from the French tax authorities – which they failed to achieve.

More it alleges that by Official Notice No. …, the Claimant was again notified that, pursuant to Section 4 of Article 65 of the PITC, the Tax Authority would proceed to the correction of the values declared in Annex J of the form 3 of Personal Income Tax of the year 2010, with information of the means of defense.

The Respondent cites, regarding the principle of declarative truth, the content of the Judgment of the Supreme Administrative Court, case 037/09 of 228/1/2009, in whose excerpt and regarding the departure from the principle of declarative truth, it can be concluded to be a matter of non-substantiation of the declared income for purposes of application of indirect methods.

In the case at hand, the Respondent alleges that what is at issue is the impossibility of recognizing the nature of the income, due to lack of material proof, with a view to its fiscal qualitative recognition, in a first phase.

And therefore the Respondent refers to the residual classification of the income within the scope of Article 23 of the CDT, because the burden of proof does not belong to the Tax Authority, but to whoever invokes the right, in accordance with the discipline of Article 74 of the GTL.

And the Respondent also refers to the Judgment of the Administrative Court of the North, in the context of case 00434/09.5BEMDL, from which it extracts that:

"From the point of view of the Appellant, the Claimant, now Appealed, never proved, as was its responsibility, that the amounts withheld from it by the employer entity in Spain were effectively delivered to the Spanish tax administration, a sine qua non requirement for the recognition of the exercise of the right to deduction [from the tax due] of those amounts. For that, it was the responsibility of the taxpayer to present a document issued (or authenticated) by the Spanish authorities, which contained the nature of the income, the respective amount and, as well, the amount of tax effectively paid in the State in question".

Alleged Violation of the Principle of Participation

The Claimant notified to attach substantiating documents of the elements declared, issued by the respective tax authority of the country in question, limited itself, according to the Respondent, to responding to the right to a hearing with the submission of an exposition with the classification of the income and a new copy of a document from Banque Populaire.

Whence the Respondent cannot invoke violation of the principle of participation.

From the Alleged Violation of the Principle of Due Decision-Making

The Respondent contests entirely this alleged defect, given that the Tax Authority decided, in light of the absence of the official elements requested, for the re-qualification of the income and for the disregard of the withholdings declared.

And regarding the non-ruling on the Requests submitted by the Claimant and the non-notification of the right to a hearing, the Respondent alleges that the Tax Authority informed the interested party as to the reasons that led to the corrections pursuant to Section 4 of Article 65 of the PITC, as is contained in the notification made to him on 2014.10.13.

From the Non-Use of the Mechanism of Information Exchange Between the Tax Authority and the French Tax Authority

In this regard, the Respondent understands that it did not impose on it the burden of proof, which fell on the taxpayer, referring, for that, to the Judgment of the Administrative Court of the North No. 00434/09 of 22-02-2012, from which the following passage is extracted:

"(…) Now, because the burden of proof of the constitutive facts of the right falls on whoever invokes it (Article 74 of the GTL and 342 of the Civil Code) it was on the taxpayer that the burden fell of demonstrating the right to deduct from the tax due the amount relating to international double taxation, that is, the income tax paid abroad (Article 81 of the PITC)".

And also that:

"(…) the possibility of information exchange between the competent authorities of the Contracting States cannot imply a reversal of the burden of proof (…)".

And still, in accordance with the Judgment of the Administrative Court of the North, of 10 March 05 and 10 April 05, rendered in appeals Nos. 00382/04 and 00285/02 Braga:

"Note that, for proof of payment of tax in the source State, it was not required to demand a specific document, since the law does not require a specific document. However, such proof would have to be through a document whose content (as to the amount of tax paid) was validated by the Spanish tax authorities".

Regarding the Tax Credit for Elimination of Economic Double Taxation

The Respondent again makes considerations on the various forms of elimination of economic double taxation, referring to the provisions of Article 13 of the GTL, regarding universal taxation of residents, and to Article 81 of the PITC on the discipline to be taken into account in this matter.

And recognizing that there exists a CDT concluded between Portugal and France, it recalls the provisions of Articles 23 and 24 to conclude, in summary, that in the case that the tax competence of income earned abroad, after its qualification, is exclusive to Portugal, there is no place for the granting of a tax credit, being the responsibility of the source State to eliminate double taxation.

Whence, the Tax Authority having applied Article 23 of the Convention, disregarding, due to lack of proof, the declared amounts, the competence for taxation is exclusive to Portugal and, therefore, there is no place for the granting of the tax credit for economic double taxation.

IV – FACTS

IV.1 – Proven Facts

All facts alleged are proven, although the Respondent understands that the documents presented by Banque Populaire should be presented by the Tax Authorities of France.

IV.2 – Facts Found Not Proven

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

IV.3 – Reasoning of the Matter of Fact Found Proven and Not Proven

Because in matters of fact the Tribunal does not have to rule on everything that was alleged by the parties, being its duty, rather, to select the facts that matter to the decision and to discriminate the proven matter from the not proven [cfr. Article 123, Section 2 of the TPC and Articles 607 of the CCP, applicable by virtue of Article 29, Section 1, paragraphs (a) and (b) of the LRTA)], the Tribunal selects the following that it considers juridically relevant.

The provision of bank guarantee to suspend the execution proceeding underlying the assessment here impugned (see doc. No. 4 attached to the Arguments and which the Tribunal accepts as proven, within its margin of free conduct of the proceeding and appraisal of the proof omitted in the initial phase, pursuant to the provision in Article 19 of the LRTA);

The nature of the income contained in the declaration form 3 of Personal Income Tax of the year 2010, as per docs. Nos. 2 and 10 annexed to the PI, issued by "Banque Populaire Val de France" and No. 1 attached to the Arguments of the Claimants, from the Tax Services of France, which refer to the documents issued by the banking organization managing the contract, because the French Tax Administration informs it cannot issue them, in reinforcement of those previously attached with the PI, in accordance with doc. 3, which prove to concern a life insurance policy contract, concluded with Banque Populaire;

The declared value of income, earned in 2010 from the redemption, in the amount of the Insurance contracted, corresponding to 2/5, in the amount of € 34,335.92 (2/5 X 85,837.79), (see doc. No. 2 annexed to PI);

The declared value of the tax paid to the French Tax Administration, by withholding at source by Banque Populaire, in the amount of € 6,437.79 (see doc. No. 4 annexed to PI).

Thus, taking into consideration the positions assumed by the parties, the documentary proof attached to the case and the PA annexed, it is considered that all facts are proven, and the tax paid, notwithstanding the fact that they were not issued nor certified by the Tax Authorities of France, due to declared impossibility, as per doc. No. 1 attached to the Arguments, which the Tribunal accepts as proof document.

As for, finally, the qualification of the income in question as interest, because it is no longer a matter of fact, this question will be dealt with in the law applicable part.

V – CLARIFICATION

The request for constitution of the arbitral tribunal was accepted by the President of the CAAD and notified to the Tax Authority and Customs Authority on 10 April 2015.

Pursuant to the provision in Section 1 of Article 6 and paragraph (b) of Section 1 of Article 11 of the LRTA, the Deontological Council designated as arbitrator of the singular arbitral tribunal the signatory, who communicated acceptance of the charge within the legally provided period.

On 03 June 2015 the parties were duly notified of this designation, having manifested no will to refuse the designation of the arbitrator, pursuant to the conjugated provisions of Article 11, Section 1, paragraphs (a) and (b) of the LRTA and Articles 6 and 7 of the Deontological Code.

In conformity with the provision in paragraph (c) of Section 1 of Article 11 of the LRTA, the collective arbitral tribunal was constituted on 26 February 2015.

The Tribunal is competent and the parties have legal personality and capacity, are legitimate and are duly represented (Articles 4 and 10, Section 2, of the same statute and Article 1 of Ordinance No. 112-A/2011 of 22 March).

The proceeding does not suffer from nullities, having the Respondent raised the lack of absolute material jurisdiction of the Arbitral Tribunal to recognize the right of the Claimants to payment of compensation for undue provision of guarantee.

VI – LAW

VI.1 – QUESTION OF LACK OF ABSOLUTE MATERIAL JURISDICTION OF THE ARBITRAL TRIBUNAL TO RECOGNIZE THE RIGHT OF THE CLAIMANTS TO PAYMENT OF COMPENSATION FOR UNDUE PROVISION OF GUARANTEE

The Claimants formulated a request for compensation for undue provision of bank guarantee, should it come to be considered the existence of error attributable to the services in the assessment of the tax now impugned.

The Respondent comes to invoke, in its Response, the Lack of Absolute Material Jurisdiction of the Arbitral Tribunal, as a preliminary issue, which is appraised now.

The Respondent justified its position by invoking the provisions of Article 4 of the LRTA on the matters of jurisdiction of the Arbitral Tribunals, as well as the provision in the various paragraphs of the Tax Authority Binding Ordinance No. 112-A/2011 of 22 March.

More it stated that the incompetence of the Tribunal constitutes a dilatory exception of knowledge ex officio that determines dismissal of the action pursuant to Article 576 and paragraph (a) of Article 577 of the Code of Civil Procedure (CCP) applicable by virtue of Article 29, Section 1, paragraph (e) of the LRTA.

The Claimants do not agree with this position, referring to the teachings of the Honorable Judge Counselor JORGE LOPES DE SOUSA in Commentary on the Legal Regime for Tax Arbitration, Guide to Tax Arbitration, Coord. NUNO VILLA-LOBOS and MÓNICA BRITO VIEIRA, Almedina, 2013, in which they state that:

"the recognition of rights and legitimate interests in tax matters, outside the cases in which may underlie the declaration of legality of acts or appraisal of the questions indicated in Section 1 of Article 2 of the LRTA, is outside the jurisdiction of the arbitral tribunals" (cited work, p. 105).

They state that the same author adds that the Tax Authority is bound by the jurisdiction of the arbitral tribunals, pursuant to Ordinance No. 112-A/2011 of 22 March, as regards the "appraisal of all claims of taxpayers connected with assessment acts, self-assessment acts, withholding at source acts and payment on account acts that have as their object taxes which it administers" (cited work, p. 115).

And that "not within the jurisdiction of the arbitral tribunals are the powers that in judicial challenge proceedings are attributed to the tax tribunals in relation to cases whose legality appraisal is inscribed within their jurisdiction" (JORGE LOPES DE SOUSA, cited work, pp. 112 and 113).

More they cite the jurisprudence of the Arbitral Tribunal contained in the decisions of 15 September 2014 (case No. 197/2014-T) and 8 January 2015 (case No. 409/2014-T).

Whence they conclude that the dilatory exception is without merit.

In fact, the invoked jurisprudence, among other existing, refers to the provision in Article 171 of the TPC, which establishes the following:

"Article 171 – Compensation in Case of Bank Guarantee

1 – Compensation in case of bank guarantee or equivalent undue provided shall be requested in the proceeding in which the legality of the debt subject to execution is contended.

2 – Compensation should be requested in the claim, challenge or appeal or in case its ground is subsequent within 30 days after its occurrence".

Whence, as is stated in the Arbitral Judgments referred to, "the request for constitution of the arbitral tribunal has as its corollary that it is in the arbitral proceeding that will be discussed the 'legality of the debt subject to execution', whereby, as follows from the express content of that Section 1 of the referred Article 171 of the TPC, it is also the arbitral proceeding that is adequate to appraise the request for compensation for undue guarantee".

And more is stated that "the cumulation of claims relating to the same tax act is implicitly presumed in Article 3 of the LRTA, in speaking of 'cumulation of claims even if relating to different acts', which allows understanding that the cumulation of claims is also possible relating to the same tax act and the requests for compensation for compensatory interest and condemnation for undue guarantee are susceptible of being encompassed by that formula, whereby an interpretation in this sense has, at the least, the minimum of verbal correspondence required by Section 2 of Article 9 of the Civil Code".

By all the above stated, it is shown sufficient and legally founded that the dilatory exception presented by the Respondent has no legal foundation, in light of the provision in Article 3 of the LRTA and 171 of the TPC, apart from the jurisprudence and doctrine cited.

And that, therefore, the exception of incompetence of the Arbitral Tribunal to know of the request for compensation for undue provision of adequate guarantee fails, nothing preventing, therefore, the appraisal of the objects of the cause of action, which are that of annulment of the additional Personal Income Tax assessment and, as a consequence, of the compensation requested.

VI.2 – APPLICABLE LAW TO THE CAUSE OF ACTION

The disputed issue object of the present arbitral appeal consists of the non-acceptance in full, on the part of the Tax Authority, of the value and nature of the income declared by the Claimants in Annex J to the declaration form 3 of Personal Income Tax of the year 2010, derived from Banque Populaire Val de France, in the total amount of € 85,837.29 and declared of € 34,334.92 and in the non-consideration of the value of the withholding on that income, effected by the same paying entity, invoked in the referred annex, in the amount of € 6,437.79.

As the Claimants demonstrated, through the proof made, this income is derived from the redemption of a life insurance policy contract made through the referred Banque Populaire, when they still resided in France, where they invested, by contract of 20 November 2001, the amount of € 213,427.50, which resulted in a redemption, in 2010, at the time they were already residents in Portuguese territory, of the gross amount of € 300,337.29, from which the amount of € 85,837.29 relates to the income obtained, subject to withholding at source, as a final tax, by the said bank, in the amount of € 6,437.79.

The Claimants proceeded to the submission of an amended declaration form 3 of Personal Income Tax on 2013-1-14, with two Annexes J, declaring in Field 423 of Table 4, relating to Passive Subject A, the following income earned abroad:

Field 408 (Interest referred to in Section 5 of Article 72 of the PITC) - €121.00, with no mention of any withholding;

Field 423 (Other income referred to in Section 5 of Article 72 of the PITC) - € 34,334.92 of income and € 6,437.70 of tax paid abroad;

Field 414 (Capital Gains or gains from the alienation of securities – paragraphs (b), (e), (f) and (g) of Section 1 of Article 10 of the PITC)

Now, as is noted, Field 423, where € 34,334.92 of income earned abroad and € 6,437.79 of tax paid abroad were declared, relates to other income referred to in Section 5 of Article 72 of the PITC, which, at that date, had the following wording:

"Article 72 – Special Rates

(…)

5 – Capital income, as defined in Article 5, mentioned in Section 1 of Article 71, due by non-resident entities, when not subject to withholding at source pursuant to Section 2 of the same article, are taxed at the rate of 20%."

And Section 1 of Article 71 of the PITC, also with the wording at that date of 2010, had the following wording:

"Article 71 – Liberatory Rates

1 – (…)

Interest on deposits on call or at a fixed term, including certificates of deposit;

Income from debt securities, registered or bearer, as well as income from repurchase transactions, credit transfers, secured title accounts or other similar or related transactions;

Income referred to in paragraphs (h), (i), (l) and (q) of Section 2 and Section 3 of Article 5."

And for what interests the case, we proceed to refer to the provision in Section 3 of Article 5 of the Personal Income Tax Code:

"Article 5 – Category E Income

3 – The positive difference between the amounts paid by way of redemption, advance or maturity of insurance and life insurance operations and the respective premiums paid or amounts invested is also considered capital income, as well as the positive difference between the amounts paid by way of redemption, release or other form of early availability by pension funds or within the scope of other supplementary social security regimes, including those provided by mutual associations, and the respective contributions paid, without prejudice to the provision in the following paragraphs, when the amount of premiums, amounts or contributions paid in the first half of the term of the contracts represents at least 35% of the totality thereof:

(…)

Three-fifths of the income is excluded from taxation, if the redemption, advance, release or other form of early availability, as well as maturity, occurs after the first eight years of the term of the contract."

From this it is concluded that the income earned and declared by Passive Subject A in Annex J does not have the qualification of interest, but of capital income, classified in Section 5 of Article 72, in conjunction with paragraph (c) of Section 1 of Article 71 and paragraph (b) of Section 3 of Article 5, all of the PITC and, therefore, the Claimants proceeded to its inclusion in the referred Annex J to the declaration form 3 of Personal Income Tax of 2010, with the value of only 2/5 of the respective earned income (the same is to say with exclusion of 3/5), that is, € 85,837.29 X 2/5 = € 34,335.92.

The services of the Tax Authority in light of the analysis of the income declaration, verified the need to substantiate documentally, in a first phase, the value of the withholdings declared relating to the income in question of passive subject A, through a document issued by the respective French tax authority.

Note that, from the documents presented it is concluded that the provision in the final part of Section 3 of Article 5 of the PITC is shown to be complied with, as to the value and period of payment of premiums.

Now as to its classification within the scope of the CDT concluded between Portugal and France, it is easily concluded that it does not fall within the scope of Article 12 of the Convention, this type of income resulting from a Life Insurance Contract, in light of the provision in Section 3 of the referred Article 12 of the same Convention.