CAAD Arbitration on IRS Taxation of Travel Allowances (Ajudas de Custo) Under Article 2(3)(d) CIRS

ARBITRAL DECISION

I. REPORT

1.  On 10 April 2015, A... and B..., taxpayer no. ... and no. ..., hereinafter identified as the Applicants, filed a request for arbitral pronouncement with the intervention of a single arbitral tribunal, in accordance with the provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to as LRAT), in conjunction with article 102 of the Code of Tax Procedure and Process (CTPP).
   

2.  In the said request for arbitral pronouncement, the Applicants seek that the Arbitral Tribunal declare the illegality and consequent annulment of the act of additional assessment of Income Tax (IRS) and Compensatory Interest for the year 2010, corresponding to the Statement of Reconciliation of Accounts no. 2014..., which results in a payment due of € 5,213.09.
   

3.  The request for constitution of the arbitral tribunal was accepted on 14 April 2015, by His Excellency the President of CAAD and, subsequently, notification was made to the Tax and Customs Authority (hereinafter identified as the Respondent Entity).
   

4.  The Applicants did not proceed with the appointment of an arbitrator, whereby, under the provisions of article 6, no. 1, of the LRAT, the undersigned was designated by the President of the Deontological Council of CAAD to constitute the present single Arbitral Tribunal, the appointment having been accepted as legally provided.
   

5.  On 9 June 2015, the Parties were notified of this designation, and neither expressed a desire to challenge it, in accordance with the combined provisions of article 11, no. 1, subsections a) and b) of the LRAT and articles 6 and 7 of the Deontological Code.
   

6.  Thus, in conformity with the provision in subsection c) of no. 1 of article 11 of the LRAT, the arbitral tribunal was constituted on 25 June 2015.
   

7.  On 21 September 2015, the Respondent Entity filed its Response and attached the administrative file.
   

8.  On 15 December 2015, the meeting under article 18 of the LRAT took place and witness examination occurred, with written submissions subsequently being presented by the Parties.
   

9.  The Applicants support their request for annulment of the tax act of additional assessment of IRS and Compensatory Interest contested on the basis of the understanding that the amount of €20,244 was received by the first Applicant as a travel allowance, as compensation for meal and accommodation expenses that the frequent business trips and stays at construction sites of his employer entity, both in Portugal and abroad, required.
   

10. They further invoke the presentation to the Tax Inspection Services of an internal control schedule with the elements required by article 45 of the Income Tax Code, which shows the dates of travel, the countries, the works and locations and, likewise, demonstrates that the travel allowances paid were below the respective legal limit.

11. For the Applicants, the Tax Authority, in denying the right to compensation for expenses paid by the first Applicant for being on a business trip, disrespects the principle of material truth in taxation, contained in number 2 of article 5 of the General Tax Law and the rule of substance over form in the interpretation of tax norms, enshrined in number 3 of article 11 of the same Legal Instrument.

12. The Applicants further understand that: private sector workers are not required to prepare an itinerary report with travel details; travel allowances may be paid in advance by fixed amounts; they have a remuneration nature only to the extent they exceed the legal limits; the burden of proof of the excess rests with the Tax Authority; and, finally, that for the purposes of defining the minimum distance of travel that qualifies for travel allowance allocation, the service location where the worker must report should be considered, the functional activity centre within the municipality.

13. The Respondent Entity contends, for its part, that the schedule presented by the paying entity does not possess the required elements to prove that the amounts paid as travel allowances are actually intended to reimburse the first Applicant for expenses incurred in business trips because it is merely an excel spreadsheet with the global values assigned in each month with the number of monthly travel days.

14. The Respondent Entity adds that since they do not meet the requirements for their allocation provided in subsection d) of number 3 of article 2 of the Income Tax Code, the said amounts cannot be classified as "travel allowances".

15. For the Respondent Entity, regular and periodic payments made by the employer to the worker are, as a rule, considered as an integral part of remuneration, while travel allowances are characterized by their compensatory nature, aiming to reimburse the worker for expenses that they had to incur in favour of the employer entity, due to business trips.

16. For the Respondent Entity, the amounts paid by the employer entity could only be qualified as travel allowances if they were intended to reimburse the Applicant for expenses that they had to incur in service and in favour of the employer entity, with a temporary character and outside the usual place of work, when in the understanding of this entity, in the present case the amounts paid are not connected to the worker's business trips and are processed in a systematic and continuous manner, indicating a permanent nature.

17. The Respondent Entity concludes that in the present case the travel allowances paid are accessory remuneration, whereby they constitute dependent work income and as such fall within subsection a) of number 1 of article 2 of the Income Tax Code, thus being subject to Income Tax under category A.

II. SANATORY RULING

The Tribunal is materially competent and is regularly constituted, in accordance with articles 2, no. 1, subsection a), 5 and 6, all of the LRAT.

The parties have legal standing and capacity, are legitimate and are represented, in accordance with articles 4 and 10 of the LRAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

No nullities are verified, whereby it is necessary to rule on the merits of the request.

III. SUBJECT MATTER OF THE ARBITRAL PRONOUNCEMENT

The question before the Tribunal is whether the amounts paid, monthly, to the Applicant, as travel allowances should be considered as dependent work income and consequently taxed under Income Tax.

IV. MATTERS OF FACT

Proven Facts

1. On 11 April 2007, the first Applicant entered into a contract of employment with the company C... - Branch in Portugal (C...) for an indefinite term, as per copy of the contract attached as Doc. 2, with the arbitral request;

2. According to the Fifth Clause of the said contract, the place of work of the Applicant "shall be the place of execution of the works, the WORKER hereby consenting to the performance of all business trips that may prove necessary for the performance of their professional activity" as per copy of the contract attached as Doc. 2, with the arbitral request;

3. It results from the Third Clause of the contract that the issues concern the Dredging Works in Italy "... and..." and, in Portugal the artificial feeding of the Beaches of ... and..., as well as the Dredging Works of the Port of..., as per copy of the contract attached as Doc. 2, with the arbitral request;

4. The Applicant was hired to perform the functions of the professional category of labourer in accordance with the Fourth Clause of the contract, a copy of which was attached as Doc. 2, with the arbitral request;

5. According to the Schedule attached as Doc. 3 with the arbitral request, the Applicant in 2010 travelled on business for company C... A/S - Branch to:

· Spain – ... – 31 days in January, 11 days in February and 20 days in March;

· Spain – ... - 15 days in April, 22 days in May and 15 days in June;

· Portugal – ... - 22 days in July, 20 days in August and 30 days in September;

· Spain – ... – 22 days in October;

· Spain – ..., ... – 17 days in November and 10 days in December.

1. According to the testimony of the witness examined, the first Applicant in business trips for the employer entity incurred the expenses for their meals and accommodation, similar to other colleagues;

2. By Official Letter no. ..., of 21 October 2014, issued by the Tax Inspection Services of the Directorate of Finance of Lisbon, the Applicants were notified to present comments, if they so wished, on the draft corrections of the inspection report which results in the proposed correction of the taxable income of the year 2010, in the amount of € 20,244.00, because amounts were received, allegedly as travel allowances, which do not meet the requirements for their allocation provided in subsection d) of number 3 of article 2 of the Income Tax Code (see draft corrections of the inspection report attached with the administrative file);

3. From the said draft corrections of the inspection report, the following also results: "The salary of the employee is paid by C... A/S - Branch in Portugal, being composed of a base salary (€ 800 monthly) plus a component allegedly paid as travel allowances, in the fixed value of €1,446.00 per month including holiday bonus and Christmas bonus of the same value in accordance with copies of the salary slips attached in Annex I.

The supporting documents of the travel allowances presented by the employer entity by email and attached in Annex II consist of an excel spreadsheet where it is stated that there were business trips on various days of the months of January and December of the year 2010.

In this way, the employer entity does not possess, for each payment made, a schedule through which it would be possible to verify the business trips to which such charges refer, namely the respective locations, duration of stay and purpose.

It is therefore verified that we are not dealing with values intended to compensate, indemnify or reimburse the worker for expenses they had to incur in service and in favour of the employer entity, relative to the worker's business trips and which therefore have their starting point in their usual place of work. The travel allowances received monthly consist of a fixed amount and in the months of July and November are paid double" (see page 5/21 of the draft corrections of the inspection report attached with the administrative file);

1. Following notification for this purpose, the Applicants exercised their right to be heard on the draft decision notified (see page 45/114 of the administrative file);

2. By order issued on 21 November 2014, taxation was determined in accordance with that proposed in the draft, with net income being assessed in the amount of € 32,075.76, in the year 2010 (see page 15/114 of the administrative file).

The matters of fact given as proven rest on the documentary evidence produced and on the testimony of witness D..., site supervisor at C... and who accompanied the first Applicant in business trips for that company in Portugal and Spain, in the year 2010.

Unproven Facts

Of the facts with interest for the decision of the case, contained in the request for arbitral pronouncement and the response, all objects of concrete analysis, those not contained in the factuality described above were not proven.

V. ON THE LAW

1. As advanced, the question before the Tribunal is whether the amounts paid, monthly, to the Applicant, as travel allowances should be considered as dependent work income and as such fall within subsection d) of number 3 of article 2 of the Income Tax Code and, consequently be taxed under Income Tax.

2. Income from dependent work (Category A Income) is defined in article 2 of the Income Tax Code, a provision that should be interpreted as covering only cases in which monetary allocations made to workers in dependent employment aim to provide them with an increase in assets. When patrimonial allocations are in issue that aim only to compensate the worker for expenses they had to incur to ensure the exercise of their function, the incidence of the tax is ruled out (see Decision of the Supreme Administrative Court, issued in Case no. 01082/04, of 08-11-2006, in www.dgsi.pt).

In accordance with subsection d) of number 3 of article 2 of the Income Tax Code, only the following are considered dependent work income: "Travel allowances and amounts received for the use of a personal vehicle in service of the employer entity, to the extent that both exceed the legal limits or when the requirements for their allocation to State civil servants are not observed, and sums for travel, trip or representation expenses for which accounts have not been rendered by the end of the tax year". Adding in number 14 of the same legal provision that "The legal limits provided for in this article shall be those annually fixed for State civil servants."

The issue concerns the application of the legal regime of travel allowances and transport for Public Administration personnel when travelled on public service grounds, in national territory and abroad.

At the date of the facts under consideration, the payment of expense allowances to public officials was regulated by Decree-Law no. 106/98, of 24 April (travel allowances in national territory and transport in national territory and in travel abroad) and by Decree-Law no. 192/95, of 28 July (travel allowance benefit abroad).

By their very nature, travel allowances are in principle compensations for expenses incurred by the worker in favour of the employer entity "whereby it only makes sense to tax them when they exceed this function and become true "economic advantage". As long as they are limited to compensating the worker for expenses actually incurred in favour of the employer entity, the sums received are not even net income of the worker". The law presumes that this occurs when travel allowances and amounts received for the use of personal transport remain within the legal limits provided for State civil servants and whenever the requirements for their allocation to those same civil servants are observed" (Xavier de Bastos - IRS - Real Incidence and Determination of Net Income, Coimbra, 2007, p. 129).

1. The burden of proof of the excess and verification of the non-observance of the requirements for their allocation rests with the Tax Administration (see Decision of the Supreme Administrative Court, in Case no. 0146/13, of 22-05-2013, in www.dgsi.pt).

Thus, "if the Tax Administration understands that the payments which the taxpayer received from their employer entity as travel allowances and which they did not declare for Income Tax purposes constitute income subject to taxation in that tax, it is incumbent upon them to demonstrate the non-compensatory nature of those payments, invoking and demonstrating the factual elements, even if indicative, that permit such conclusion." (see Decision of the North Central Administrative Court, in Case no. 197/04, of 03/16/2006, in www.dgsi.pt). These indicative facts must, however, be sufficiently solid to create in the tribunal conviction of the truth.

Thus, as the corrections determined by the Inspection Services are contested, they can only be upheld if the evidence produced permits the tribunal to be convinced of the non-compensatory character of those payments, the Inspection Services having to proceed with the necessary investigative measures in order to gather elements that, even if indirectly, permit them to conclude with certainty of the remuneration character of the payment.

The position favourable to the worker that the tribunals have adopted is understandable "by the difficulty in which the worker finds themselves to be able to organise and present evidence about the conditions in which the payments were made to them. Thus, the tribunals have considered that it is incumbent on the taxpayer, worker, to prove only that in relation to them situations are verified that typically justify travel allowances, being sufficient that they do so through witness testimony, and provided that the circumstances of the contract also corroborate the alleged facts (TCACN, 13-01-2005, Case no. 361/04)" (in Lexit - Annotated and Commented Tax Codes Income Tax, Coord. Prof. Doctor Glória Teixeira and Master Patrícia Anjos Azevedo, 2015, p. 36).

1. In summary, verifying an actual business trip by the worker in service of the employer entity, travel allowances are only considered dependent work income:

                            i.            when they exceed the legal limits or,
   
                          ii.            when the requirements for their allocation to State civil servants are not observed;
   

In the present case, the non-observance of the respective legal limits is not questioned. The Inspection Services did not base the correction of the Applicant's income on the circumstance that these limits had been exceeded, nor were any amounts assigned in excess determined.

The inspection services based the correction on i) the circumstance that the schedule presented by the paying entity does not possess the required elements to prove that the amounts paid as travel allowances were actually intended to reimburse the Applicant for expenses incurred in business trips and, ii) the circumstance that the amounts paid are processed in a systematic and continuous manner, indicating a permanent nature.

For the Inspection Services whose corrections are at the basis of the contested assessment, the documentary evidence indispensable to proving the expenses incurred with travel allowances, in service of the employer entity, not billed to clients, consists, for each payment made, of a schedule through which it would be possible to verify the business trips to which the charges refer, as stipulated in article 45, number 1, subsection f) of the Corporate Income Tax Code.

The Services contend that this schedule must discriminate the respective places of departure and destination, duration of stay, purpose, name of beneficiary, date of travel and daily amount assigned, in order to be able to assess whether the travel allowances exceed the legally provided amount and not making annual calculations.

The inspection services conclude that the schedule presented by the Applicant is drawn up in a very summary manner, constituting only an excel spreadsheet with global values assigned in each month, as well as the number of monthly travel days not performing a discrimination of how the amount of travel allowances to be received in each month is determined, indicating for example the amount paid for travel, accommodation and meals.

However, contrary to what is sustained by the Services and by the Respondent Entity in its response, it is not considered as a requirement for the exclusion of taxation of amounts paid as travel allowances that there exist in the accounting of the paying entity descriptive documents of the travels (in Lexit - Annotated and Commented Tax Codes Income Tax, Coord. Prof. Doctor Glória Teixeira and Master Patrícia Anjos Azevedo, 2015, p. 35).

The jurisprudence has, rather, understood that "The proof of the facts necessary to conclude about the nature of travel allowances of payments made to workers in dependent employment may be effected by any means admissible in law, it not being essential that itinerary reports be issued with content similar to those provided for State officials" (see Decision of the North Central Administrative Court, issued in Case no. 00116/04, on 03-02-2005, in www.dgsi.pt).

In fact, as no special formal requirement results from subsection d) of number 3 of article 2 of the Income Tax Code for proof of the nature of travel allowances, any means of proof is admissible, in conformity with the provision in article 72 of the General Tax Law and article 115 of the Code of Tax Procedure and Process (see Decision of the North Central Administrative Court, issued in Case no. 00111/02 – BRAGA, in www.dgsi.pt).

As the schedule demanded by the Inspection Services is not a requirement for the exclusion of taxation under Income Tax of the values paid as travel allowances in the sphere of the worker, their non-existence or imperfection does not justify taxation by itself.

Notwithstanding the foregoing, it should also be noted that the Inspection Services do not question that the Applicant, in 2010, travelled on business for C... for works that took place in different locations in Spain and in a location in Portugal. Nor did they ever invoke that the locations where the works took place correspond to the contractually stipulated place of work of the Applicant, which could put into question the qualification in the present case as travel allowances.

On the basis of Document 3, attached with the arbitral request and the witness evidence produced, it was proven that in that year the Applicant travelled to Avilés, Coruña, Cádiz and Ibiza in Spain and to Forte Novo-Garrão in Portugal and that they did so in service of C... (the entity with which they had entered into a contract of employment for an indefinite term in 2007), performing the duties of construction site labourer, for a total of 235 days.

As already advanced, in the present case the Inspection Services did not base the correction of the Applicant's income on the circumstance that the legal limits had been exceeded, the declared income having been corrected by an amount equal to the total assigned as travel allowances.

In this case, the non-existence of the schedule demanded by the Inspection Services or the deficiencies in its completion could only constitute an indication of the non-existence of the business trips, and these being proven, such non-existence or deficiencies are not apt to demonstrate the non-existence of expenses resulting from the business trips.

The Inspection Services further based the notified correction on the circumstance that the travel allowances consisted of a "fixed amount which amounts to a fixed monthly income independent of the costs borne by the worker" (see page 10/24 of the inspection report attached with the administrative procedure).

The jurisprudence has understood that the character of permanence or regularity with which amounts are paid as travel allowances does not permit, by itself, the conclusion that they have ceased to constitute a compensation, that is, it does not permit, by itself, to disqualify their quality as travel allowances (see Decision of the South Central Administrative Court, issued in Case no. 00195/04, of 21-06-2005 and Decision of the Supreme Administrative Court, issued in Case no. 0901/14, of 28-01-2015, both in www.dgsi.pt).

The remuneration nature of travel allowances does not arise from the mere verification that their value is repeated over the months.

In the same manner, it has been understood that it does not disqualify the quality of travel allowances the assignment of amounts at that title superior to the amounts received as monthly remuneration.

In this sense, note the Decision issued by the North Central Administrative Court, in Case no. 00272/06.7BEPNF, on 8 May 2008, according to which it is "(...) completely inconsequential for the purpose the circumstance that the amount received as travel allowances is superior to the monthly salary. As results from the provision of art. 2, no. 3, subsection d) CITC, no ceiling is placed on the value that can be received as travel allowances, beyond the exceeding of the legal amounts of the same type of benefit provided for State civil servants, and, even in this latter case, the effect is not to disqualify the travel allowances, but rather, maintaining this same condition, to tax the amount corresponding to the excess" (in www.dgsi.pt).

However, it has already been considered an indication of such remuneration nature the circumstance that the amount paid as travel allowances includes holiday bonus and Christmas bonus (see Decision of the Supreme Administrative Court, in Case no. 0764/10, of 05-07-2012, Decision of the North Central Administrative Court, issued in Case no. 197/04, of 03/16/2006, both in www.dgsi.pt). And, in fact, from the elements attached to the file it results that the travel allowances included the amounts paid to the Applicant as holiday bonus and Christmas bonus (see page 6/24 and Annex I of the inspection report attached with the administrative procedure).

It is considered, however, that this indication by itself is not sufficiently solid to justify the correction. As already advanced, the Inspection Services did not put into question that the Applicant had carried out the above identified travels in service of their employer entity, nor did they put into question that the period corresponding to each travel did not correspond to those indicated there, when from the elements attached to the file it results that in the year 2010 the Applicant was absent abroad 163 days and in the country 72 days, which total 235 days of travels.

Thus, not questioning the carrying out of the travels, which according to the rules of common experience imply expenses, it was incumbent on the Inspection Services to demonstrate that the expenses with the travels were not paid by the Applicant, or that they were reimbursed to them by the company via another route, or that the amount paid as travel allowances was superior to that of the expenses actually incurred, representing a gain for the Applicant.

However, the Services did not base the correction on any of these circumstances, not demonstrating, through solid indications, that the Applicant did not incur the said expenses during the travels, nor that the expenses incurred were clearly inferior to the values received to compensate them, so that they can be qualified as remuneration.

Rather, it was proven in the record that the Applicant carried out various travels abroad and within the country and that in those travels they incurred the expenses for their own accommodation and meals.

Given the foregoing, it is considered that it cannot be concluded as to the remuneration nature of the values paid as travel allowances, whereby the annulment of the assessed Income Tax and Compensatory Interest is ordered.

VI. DECISION

In light of the foregoing, the request for annulment of the act of additional assessment of Income Tax and Compensatory Interest, for the year 2010, corresponding to the Statement of Reconciliation of Accounts no. 2014..., which results in a payment due of € 5,213.09, issued in the name of the Applicants, is judged to be well-founded.

The value of the case is fixed at € 5,213.09 (five thousand, two hundred and thirteen euros and nine cents), in accordance with article 97-A of the Code of Tax Procedure and Process, applicable by force of the provision in subsection a) of number 1 of article 29 of the LRAT, and of number 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

Costs, in the amount of € 612.00 (six hundred and twelve euros), in accordance with Table I of the RCPAT, at the expense of the Respondent Entity given that the present request was judged to be well-founded, and in compliance with the provision in number 2 of article 12, and number 4 of article 22, both of the LRAT, and the provision in number 4 of article 4 of the cited Regulation.

Notify.

Lisbon, 17 February 2016

[Text prepared by computer, in accordance with article 131, number 5 of the Code of Civil Procedure (CCP), applicable by referral of article 29, no. 1, subsection e) of the LRAT, with blank verses and reviewed by the undersigned].

The Arbitrator

(Ana Moutinho Nascimento)