Madeira Free Zone IRC Tax: Regional Surcharge and Arbitral Tribunal Competence (CAAD 247/2015-T)

Arbitral Decision

CAAD: Tax Arbitration

Case No. 247/2015-T

Subject: Madeira Free Zone, regional surcharge, jurisdiction of the arbitral tribunal

The arbitrators Dr. Jorge Manuel Lopes de Sousa (arbitrator-president), Prof. Doctor João Sérgio Ribeiro and Dr. A. Sérgio de Matos, designated by the Ethics Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 21-07-2015, agree as follows:

1. Report

A…, S.A. Madeira Free Zone, legal entity number …, hereinafter referred to as Claimant, having been notified of the dismissal of the administrative review No. … (relating to the IRC assessment No. 2014 … of the tax period 2013), filed a request for constitution of the collective arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (hereinafter "RJAT"), having in view the declaration of illegality of the IRC assessment No. 2014 …, in the part corresponding to the Regional Surcharge in the amount of €1,370,522.40, respective late payment interest in the amount of €40,184.28 and costs in the amount of €14,172.39.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and notified to the TAX AUTHORITY AND CUSTOMS AUTHORITY on 15-04-2015.

Pursuant to the provisions of subsection a) of article 6, paragraph 2, and subsection b) of article 11, paragraph 1, of RJAT, the Ethics Council designated as arbitrators the signatories, who communicated acceptance of the assignment within the applicable period.

On 09-06-2015, the Parties were notified of this designation and did not express willingness to refuse the designation of the arbitrators, pursuant to the combined provisions of article 11, paragraph 1, subsections a) and b), of RJAT and articles 6 and 7 of the Ethics Code.

Thus, in accordance with the provisions of subsection c) of article 11, paragraph 1, of RJAT, the collective arbitral tribunal was constituted on 21-07-2015.

The Tax Authority and Customs Authority responded by raising the exceptions of lack of passive legitimacy, lack of jurisdiction of the Arbitral Tribunal, and untimeliness.

By order of 01-10-2015, the meeting provided for in article 18 of RJAT was waived and it was decided that the case proceed with written arguments.

The Parties filed written arguments.

The arbitral tribunal was duly constituted.

The parties possess legal personality and capacity (arts. 4 and 10, paragraph 2, of the same statute and art. 1 of Order No. 112-A/2011, of 22 March) and are duly represented.

The case does not suffer from any nullities.

2. Exceptions

It is necessary to examine, first and foremost, the exceptions, beginning with lack of jurisdiction, which is logically prior, as is recognized in article 13 of the Code of Procedure in Administrative Courts of 2002, applicable to tax arbitration proceedings by virtue of the provision in article 29, paragraph 1, subsection c), of RJAT. In the case at hand, however, the question of lack of jurisdiction is connected with that of lack of passive legitimacy for intervention in the arbitration proceedings.

The acceptance of either of the exceptions shall constitute an obstacle to the examination of the merits.

2.1. Facts relevant to examining the exceptions

• On 29-05-2014, assessment No. 2014 … was issued by the Tax Authority and Customs Authority, in the amount of €1,670,581.40, a copy of which constitutes document No. 2 attached with the request for arbitral decision, the contents of which are reproduced herein, in which it is noted that it is signed by the Director General of the Tax Authority and Customs Authority and has a voluntary payment deadline of 06-08-2014;

• In that assessment, the additional amount of €1,670,581.40 was assessed, of which €265,902.24 related to "Surcharge", €1,370,522.40 related to "State Surcharge" and €34,156.77 related to "Late payment interest" (Document No. 2 attached with the request for arbitral decision);

• On 28-08-2014, in the tax enforcement case No. …2014…, the Claimant was summoned, a copy of which appears in document No. 1 attached with its written arguments, the contents of which are reproduced herein, which aims at the coercive collection of the debt of €1,670,581.40;

• On 04-12-2014, the Claimant filed an administrative review of the said assessment at the Tax Office of Funchal-…, directed to the Director of Regional Tax Affairs (document No. 7 attached with the request for arbitral decision, the contents of which are reproduced herein);

• By Letter No. …, dated 12-12-2014, the Claimant was notified to exercise the right to be heard in the administrative review procedure, in the terms appearing in document No. 8 attached with the request for arbitral decision, the contents of which are reproduced herein, which refers, among other things, to the following:

– "4. The claimant company holds the status of a company duly licensed to operate in the Madeira Free Zone";

– "5. However, despite this status, and contrary to the alleged by the claimant, the fact that the company is duly licensed to operate in the Madeira Free Zone is not sufficient reason to exempt the claimant from payment of the regional surcharge, in the amount of €1,370,522.40"; and

– "6. This is because, to benefit from the exemption of payment of the regional surcharge, it is necessary to verify the attribution of income obtained, namely whether they result from activity carried out under the regime of exemption or reduction of the IRC rate";

– "7. However, in the present case, and as is apparent from the information provided by the Tax Inspection Services Department, in the record at pages 48 and following, the obtaining of income that generated the determination of that amount of €1,370,522.40, in assessment No. 2014 …, the subject of this review, derived from the claimant's activity subject to the general regime of IRC taxation, that is, activity to which the exclusion regime does not apply, regulated in paragraph 5 of article 6 of the annex that forms an integral part of the republication of the regional surcharge regime, established by Regional Legislative Decree No. 14/2010/M, of 5 August";

• By order of 06-01-2015, the Director of Regional Tax Services partially granted the administrative review, annulling the assessment with respect to the amount of €265,902.24, relating to the municipal surcharge, and maintaining the assessment only with respect to the amount of €1,370,522.40, relating to the regional surcharge (document No. 1 attached with the request for arbitral decision, the contents of which are reproduced herein);

• The Claimant was notified of said order by Letter No. …, of 12-01-2015, from the Regional Tax Affairs Department, which refers, among other things, to the following:

"Following the administrative review presented by Your Excellency at the Tax Office of Funchal …, requesting the annulment of assessment No. 2014… in the amount of €1,670,581.40 (Late Payment Interest included in the amount of €34,156.77), relating to IRC for the tax year 2013, partial relief was granted by order of the 6th of the current month, by the Director of Regional Tax Affairs, pursuant to article 75 of CPPT and in accordance with the delegation of powers referred to in No. 1.27 first part of the Order published in JORAM, II Series of 17 September, annulling the partial amount of €265,902.24 required in the disputed assessment as municipal surcharge, while maintaining the exigibility of the amount of €1,370,522.40, due as regional surcharge and which is already being collected under the Tax Enforcement Procedure …2014…, pursuant to article 6, paragraph 5, of the annex forming part of the republication of the regional surcharge regime, established by Regional Legislative Decree No. 14/2010/M of 05/08.

With best regards

For the Regional Director

B…

Regional Sub-Director of Tax Affairs" (document No. 1 attached with the request for arbitral decision)

• On 30-04-2014, based on Service Order No. OI2014…, the Tax Inspection Services of the Finance Department of Funchal, integrated in the Regional Tax Affairs Department of the Autonomous Region of Madeira, initiated an inspection of the Claimant (document No. 4 attached with the request for arbitral decision, the contents of which are reproduced herein);

• In the referred procedure, the Corrections Project was prepared, on 26-06-2014, a copy of which constitutes document No. 4 attached with the request for arbitral decision, the contents of which are reproduced herein, in which, among other things, the value of the regional surcharge to be assessed is indicated as €1,370,522.41;

• The Claimant was notified of said project for the purpose of exercising the right to be heard by Letter No. …, of 03-07-2014, sent by the said Regional Tax Affairs Department (document No. 4, attached with the request for arbitral decision);

• The Claimant did not exercise the right to be heard regarding the said Corrections Project;

• In the same inspection procedure, on 30-07-2014, the said Tax Inspection Services of the Finance Department of Funchal prepared the Tax Inspection Report, a copy of which constitutes document No. 5 attached with the request for arbitral decision, the contents of which are reproduced herein, in which, among other things, the value of the regional surcharge to be assessed is indicated as €1,370,522.41;

• The Claimant was notified of said Report by Letter No. …, of 06-08-2014, sent by the said Regional Tax Affairs Department, the notification referring, among other things, to the following:

"You are hereby notified, pursuant to article 62 of RCPIT, of the corrections resulting from the inspection action, whose report/conclusions are attached as an integral part of this notification, concerning the Service Order referenced above.

Of the purely arithmetic corrections made to the taxable matter and/or tax, without recourse to indirect valuation, whose grounds appear in the said Report. Shortly, the Tax Authority services will proceed to notify the respective assessment, which will contain the means of defense as well as the payment period, if applicable. Against this notification and its respective grounds, no review or contestation is available" (document No. 5, attached with the request for arbitral decision);

• On 13-04-2015, the Claimant filed the request for arbitral decision that gave rise to the present case in which, among other things, it contends that "this request for arbitral decision should be judged to be well-founded, as proven, and consequently, the illegality of IRC assessment No. 2014 … should be declared, in the part corresponding to the Regional Surcharge in the amount of €1,370,522.40, respective late payment interest in the amount of €40,184.28 and costs in the amount of €14,172.39".

2.2. Unproven facts and reasoning on matters of fact

The Tax Authority and Customs Authority did not attach to the record any administrative file, so the decision on matters of fact is based solely on the documents submitted by the Claimant.

Thus, it was not proven that there was any procedure carried out by the Tax Authority and Customs Authority prior to assessment No. 2014 ….

It was also not proven that, following the inspection procedure, the assessment was made that was announced in the notification would be notified "shortly".

2.3. Clarification of the procedural situation

First of all, the unusual procedural situation that appears in the record and the subject matter of the present case must be clarified.

2.3.1. Relationship between the challenged assessment and the inspection procedure

It is noted that, on 29-05-2014, the Tax Authority and Customs Authority issued assessment No. 2014 …, which the Claimant challenges, in which the amount of €1,370,522.40 is included, relating to "State Surcharge".

Meanwhile, on 30-04-2014, services of the Finance Department of Funchal, integrated in the Regional Tax Affairs Department of the Autonomous Region of Madeira, initiated an inspection procedure, which only concluded on 30-07-2014, after that assessment had already been notified. In this Tax Inspection Report, it is concluded, among other things, that a correction in the amount of €1,370,522.41 should be made relating to "Regional Surcharge".

Obviously, this inspection procedure did not underlie that assessment act since the latter was made before the former was concluded.

On the other hand, in that assessment, the sum of €1,370,522.40, relating to "State Surcharge", was assessed, while in the Tax Inspection Report it was concluded that a correction of €1,370,522.41 (one cent more than the amount indicated in the assessment) should be made, relating to "Regional Surcharge" and not state surcharge.

For this reason, it is concluded that the referred assessment has nothing to do with this inspection procedure, which is confirmed by the fact that, in the notification of the Tax Inspection Report, it was announced that the Tax Authority services would proceed "shortly" to notify the respective assessment (which was not proven to have occurred).

Consequently, the question of jurisdiction to examine the request formulated by the Claimant, which is a declaration of illegality of the assessment, late payment interest and costs, must be examined only in light of the challenged assessment, the administrative review and the respective decision.

2.3.2. Act that is the subject matter of the case and its content

The Claimant requests the declaration of illegality of IRC assessment No. 2014 …, in the part corresponding to the Regional Surcharge in the amount of €1,370,522.40, respective late payment interest in the amount of €40,184.28 and costs in the amount of €14,172.39.

Apparently, that assessment was not preceded by any inspection procedure, since, as referred to, the only one of which there is knowledge concluded after that assessment was notified, the correction it proposed refers to "regional surcharge" and not "state surcharge" and the amount of the correction shows a small difference (one cent).

But, as can be seen from the administrative review filed, the Claimant interpreted that reference in the assessment to "state surcharge" as relating to "regional surcharge" and the decision on the administrative review gave this classification to the tax assessed with that designation and justified the maintenance of the assessment on that part.

In these cases of administrative challenge of assessment acts (namely administrative review and administrative appeal of assessment acts), if the respective decision maintains the challenged act, wholly or partially, with different reasoning, it should be understood that revocation by substitution of that assessment act occurs (as follows from article 147 of the Code of Administrative Procedure of 1991) in the part maintained with new reasoning, with a new act continuing to exist in the legal order which, despite maintaining the same decision content, in the maintained part, will have the new reasoning.[1]

Thus, in the case at hand, after the decision on the administrative review, the act that remains in the legal order is that of assessment, in the non-revoked part, but with the reasoning that appears in the decision on the administrative review.

2.4. Question of lack of jurisdiction

2.4.1. Positions of the Parties

The Tax Authority and Customs Authority raised the exception of material lack of jurisdiction of this Arbitral Tribunal for the following reasons, in summary:

• the jurisdiction of the arbitral tribunals functioning in CAAD is defined by the scope of the binding of the tax administration to their jurisdiction, as defined by the government members responsible for the areas of finance and justice, pursuant to the provisions of article 4, paragraph 1, of RJAT, as amended by Law No. 64-B/2011, of 30 December;

• The Tax Authority and Customs Authority is the sole service bound to arbitral jurisdiction, as defined in Order No. 112-A/2011, of 22 March;

• the decision to dismiss (partially) the administrative review was issued by the Director of Regional Tax Affairs of the Autonomous Region of Madeira, who is not part of the Tax Authority and Customs Authority nor the Minister of Finance, but rather the Autonomous Region of Madeira;

• pursuant to article 1, paragraph 1, of Regional Regulatory Decree No. 2/2013/M, "the Regional Tax Affairs Department, abbreviated as DRAF, is the central service of the direct administration of the Autonomous Region of Madeira, abbreviated as RAM, to which article 5, paragraph 6, subsection a), of Regional Regulatory Decree No. 4/2012/M, of 9 April, refers, which has the mission to ensure and manage income taxes, consumption taxes, consumption taxes, property taxes and other legally provided taxes, as well as execute the policies and fiscal guidelines defined by the Regional Government of Madeira, in tax matters to be exercised within the Autonomous Region of Madeira, in accordance with articles 140 and 141 of Law No. 130/99, of 1 August, namely the assessment and collection of taxes that constitute revenue of the Region";

• article 227 of the Constitution establishes that autonomous regions are territorial legal entities and have the powers set forth in that same norm and to be defined in their respective statutes;

• pursuant to the Political-Administrative Statute of the Autonomous Region of Madeira, approved by Law No. 13/91, of 5 June, "the Autonomous Region of Madeira is a territorial legal entity, endowed with legal personality of public law";

• The Regional Tax Affairs Department constitutes the autonomous regional administration that forms part of the Autonomous Region of Madeira, and is therefore not covered by Order No. 112-A/2011;

• article 107 of the Political-Administrative Statute of the Autonomous Region of Madeira provides that the same exercises its own tax power;

• pursuant to article 112, paragraph 1, subsection b), of the same Statute, "tax revenues of the Region are, in accordance with the law, those relating to or resulting from, in particular, the following taxes: b) From the Corporate Income Tax";

• The Autonomous Region of Madeira has its own tax power, consisting of, namely, the right to dispose of all tax revenues collected in its territory, regardless of their nature and specific category, and to dispose of them;

• The Rectified Budget of the Autonomous Region of Madeira for the year 2010 provides, in article 3 and following, for the creation of the Regional Surcharge as a measure of extraordinary financing of the Region;

• pursuant to article 1, paragraph 2, of Decree-Law No. 18/2005 which: "it is incumbent upon the Regional Government of the Autonomous Region of Madeira to exercise the fullness of competences provided in the Constitution and in law with respect to its own tax revenues, performing all necessary acts for their administration and management";

• article 140, paragraph 2, subsection a), of the Political-Administrative Statute of the Autonomous Region of Madeira determines that the capacity of the Autonomous Region of Madeira to be the active subject of the taxes collected therein comprises the power of the Regional Government to create the competent tax services for the assessment, collection and administration of the taxes of which it is the active subject;

• It is incumbent, in particular, upon the Regional Tax Affairs Department and with respect to its own tax revenues, "to ensure the assessment and collection of income taxes, property taxes, consumption taxes and other taxes it is responsible for administering, as well as to collect and receive other revenues of the Region or legal entities of public law";

• pursuant to article 3 of Decree-Law No. 18/2005, "the Ministry of Finance will provide the Regional Government of Madeira with the necessary technical and administrative support for the functioning of the services referred to in the preceding article, with a view to ensuring a single tax system and its uniform application throughout the national territory";

• the regional surcharge was assessed by the Autonomous Region of Madeira, since it was the tax inspection services of the Regional Tax Affairs Department that carried out the inspection procedure in question;

• any intervention by the Tax Authority and Customs Authority in the procedure here in question was done under the cooperation duty provided for in article 3 of Decree-Law No. 18/2005, of 18 January;

• The Regional Tax Affairs Department and the Regional Government of the Autonomous Region of Madeira have not bound themselves to the Legal Regime of Tax Arbitration;

• the binding of the Tax Authority and Customs Authority to arbitral supervision presupposes a limitation of the situations in which it can fully decide whether or not to appeal an unfavorable judicial decision, that is, the power to choose between permanently renouncing the collection of the tax credit or adopting potentially appropriate behavior to seek to enforce it;

• it is constitutionally forbidden, by virtue of the constitutional principles of the rule of law and separation of powers (cf. articles 2 and 111, both of the Constitution), as well as the right of access to justice (article 20 of the Constitution) and legality [cf. articles 3, paragraph 2, 202 and 203 of the Constitution and also article 266, paragraph 2, of the Constitution], in its corollary of the principle of unavailability of tax credits inherent in article 30, paragraph 2, of the General Tax Law, an interpretation that extends the binding of the Tax Authority to arbitral supervision as established by law.

The Claimant responded in its written arguments, saying, in summary, the following:

• what is at issue in the present request is the partial annulment of the IRC assessment relating to the Regional Surcharge and not the dismissal (partial) of the administrative review;

• the assessment whose declaration of illegality is questioned was made by the Tax Authority and Customs Authority;

• the position of the Tax Authority and Customs Authority constitutes disregard for the principle of good faith that guides the relationship between the administration and taxpayers, given the evidence shown regarding which entity proceeded with the assessment sub judice;

• Regional Regulatory Decree No. 2/2013/M, of 1 February, provides that DRAF ensures the assessment of taxes that constitute revenue of the Autonomous Region of Madeira, but it is important to verify whether it actually does so and, by not being in a position to do so, article 12 of Regional Regulatory Decree No. 2/2013/M, of 1 February (in force at the time of assessment) provided that "until all the logistical means necessary to exercise the fullness of the attributions and competences provided in article 2 of this statute are installed, the Tax Authority, through its departments and services, will continue to ensure the carrying out of procedures in administrative and IT matters necessary for the exercise of attributions and competences transferred to RAM, including those relating to the assessment and collection of taxes that constitute revenue of RAM itself";

• the situation is different from that which was the subject of case No. 89/2012-T, since in that case the additional IRC assessment was made by DRAF through the Tax Office of Funchal;

• the binding of the Tax Authority to arbitral jurisdiction in the present case should be recognized, in the sense that it was the Tax Authority that performed the assessment act that is the subject of the request for arbitral decision and the competence for the assessment and collection of taxes, even though they constitute own revenue of RAM, also belongs to the Tax Authority;

• the acceptance of this exception would be a violation of the principle of effective judicial protection, provided for in article 268, paragraph 4, of the Constitution of the Portuguese Republic, thus allowing the Tax Authority, through a deviant and erratic behavior with the constitutional principles in force in the Portuguese legal system, to adopt a series of illegal and unconstitutional conduct in breach of what is set forth in article 266, paragraph 2, of the Constitution.

2.4.2. Examination of the question of lack of jurisdiction

The jurisdiction of the arbitral tribunals functioning in CAAD is defined, in the first place, by article 2, paragraph 1, of RJAT, which establishes the following:

1 - The jurisdiction of the arbitral tribunals comprises the examination of the following claims:

a) Declaration of illegality of acts of assessment of taxes, self-assessment, withholding at source and payment on account;

b) Declaration of illegality of acts of determination of the taxable base when it does not give rise to the assessment of any tax, acts of determination of the assessable base and acts of determination of patrimonial values;

In the second place, the jurisdiction of the arbitral tribunals functioning in CAAD is limited by the binding of the Tax Authority and Customs Authority which, pursuant to article 4, paragraph 1, of RJAT, was defined by Order No. 112-A/2011, of 12 March, which establishes the following, insofar as it is relevant:

Article 1

Binding to CAAD

By this order, the following services of the Ministry of Finance and Public Administration are bound to the jurisdiction of the arbitral tribunals functioning, pursuant to Decree-Law No. 10/2011, of 20 January, in CAAD — Centre for Administrative Arbitration:

a) The General Directorate of Taxes (DGCI); and

b) The General Directorate of Customs and Special Consumption Taxes (DGAIEC).

Article 2

Object of the binding

The services and bodies referred to in the preceding article are bound to the jurisdiction of the arbitral tribunals functioning in CAAD which have as their object the examination of claims relating to taxes whose administration is entrusted to them, as referred to in paragraph 1 of article 2 of Decree-Law No. 10/2011, of 20 January, with the exception of the following:

a) Claims relating to the declaration of illegality of acts of self-assessment, withholding at source and payment on account that have not been preceded by recourse to the administrative procedure as set forth in articles 131 to 133 of the Code of Tax Procedure and Process;

b) Claims relating to acts of determination of the assessable base and acts of determination of the taxable base, both by indirect methods, including the decision of the review procedure;

c) Claims relating to customs duties on importation and other indirect taxes affecting goods subject to import duties; and

d) Claims relating to the tariff classification, origin and customs value of goods and tariff quotas, or whose resolution depends on laboratory analysis or procedures to be carried out by another Member State in the context of administrative cooperation in customs matters.

By virtue of the provision in article 12, paragraph 2, of Decree-Law No. 118/2011, of 15 December, the references made to DGCI and DGAIEC in article 1 of Order No. 112-A/2011 are to be understood as made to the Tax Authority and Customs Authority.

It follows from these norms, with the updating imposed by Decree-Law No. 118/2011, that the jurisdiction of the arbitral tribunals functioning in CAAD only covers acts of the types referred to in article 2 of RJAT "which have as their object the examination of claims relating to taxes whose administration is entrusted" to the Tax Authority and Customs Authority.

Thus, the decisive element for defining the scope of the binding and of jurisdiction is not the entity that performed the act whose declaration of illegality the taxpayer seeks, nor the destination of the revenue obtained from the collection of the tax, but rather the entity to whom the administration of the tax is entrusted: if it is concluded that the administration of the tax whose illegality the Claimant seeks to have declared is entrusted to the Tax Authority and Customs Authority, one would be dealing with a claim that falls within the jurisdiction of the arbitral tribunals functioning in CAAD.

In tax terminology, the administration of a tax is considered to be the activity of performing primary tax acts creating tax legal relationships and enforcing them, namely assessment and collection, which are the activities that characterize an administrative entity as a tax administration, as follows from paragraph 3 of article 1 of the General Tax Law, referring to "public entities legally responsible for the assessment and collection of taxes", and are indicated in article 2, paragraphs 1 and 2, subsection a), of Decree-Law No. 118/2011, of 15 December, as primary activities of the Tax Authority and Customs Authority.

The fact that the assessment was issued by the Tax Authority and Customs Authority and signed by the Director General is, by itself, irrelevant for the purpose of defining the jurisdiction of the arbitral tribunals functioning in CAAD, as this will only be verified if the administration of the tax in question is entrusted to the Tax Authority and Customs Authority.

The tax to which the challenged assessment relates is, regardless of the legality of the assessment, IRC. The state surcharge referred to therein is also IRC.

The assessment and collection of income taxes, which constitute "administration" of the tax, is entrusted to the Tax Authority and Customs Authority, as follows from the express wording of article 2, paragraph 2, subsection c), of Decree-Law No. 118/2011, of 15 December.

For this reason, if it were a matter of state surcharge, it would be unequivocal that the competence to administer the tax belongs to the Tax Authority and Customs Authority.

However, as stated, it should be considered that the decision on the administrative review constitutes a modification of the assessment, which now rests on its respective reasoning that characterizes it as "regional surcharge". On the other hand, this assessment with the reasoning given to it in the administrative review was not issued by the Tax Authority and Customs Authority, but rather by the Director of Regional Tax Affairs of the Autonomous Region of Madeira.

For this reason, the question of jurisdiction must be examined based on these assumptions.

The regional surcharge was created by article 3 of Regional Legislative Decree No. 14/2010/M of 5 August, under the authority of subsection f) of paragraph 1 of article 37 of the Political-Administrative Statute of the Autonomous Region of Madeira, approved by Law 13/91, of 5 June, and revised by Law 130/99, of 21 August, with the amendments provided for in Law 12/2000, of 21 June, combined with paragraph 1 of article 56 of Organic Law 1/2010, of 29 March, and article 2 of Law 12-A/2010, of 30 June, which approved the law of budget consolidation.

Article 69 of the Political-Administrative Statute of the Autonomous Region of Madeira, republished by Law No. 130/99, of 21 August, establishes the following, insofar as it is relevant:

"It is incumbent upon the Regional Government

(...)

aa) To manage, in accordance with this Statute and the law, the tax revenues collected or generated in the Region, as well as participation in the State's tax revenues, and other revenues attributed to it, and to allocate them to its expenses;"

Pursuant to article 107, paragraph 3, of the same Statute, "the Region has, in accordance with the Statute and the law, the tax revenues collected or generated therein, as well as participation in the State's tax revenues, established according to a principle that ensures effective national solidarity, and other revenues attributed to it, and allocates them to its expenses".

Article 108 of the same Statute establishes that

"The Region's revenues constitute:

(...)

b) All taxes, fees, fines, penalties and surcharges collected or generated in its territory, including stamp duty, customs rights and other impositions collected by customs, namely taxes and price differentials on gasoline and other petroleum derivatives;

Article 112 of the same Statute provides that "tax revenues of the Region are, in accordance with the law, those relating to or resulting from, in particular, the following taxes: (...) b) From corporate income tax;" and "late payment interest and compensatory interest levied on taxes that constitute own revenues of the Region".

The Regional Surcharge that is the subject of the present case, in addition to being framed in the IRC, was created by the Legislative Assembly of Madeira, under the authority of subsection f) of paragraph 1 of article 37 of the Political-Administrative Statute of the Autonomous Region of Madeira, which allows it to "exercise its own tax power and adapt the national tax system to the Region in accordance with this Statute and the law".

On the other hand, article 1, paragraph 2, of Decree-Law No. 18/2005, of 18 January, expressly transferred to the Regional Government of the Autonomous Region of Madeira the competence to "exercise the fullness of competences provided in the Constitution and in law with respect to its own tax revenues, performing all necessary acts for their administration and management" and paragraph 3 of the same article abolishes the Finance Department of the Autonomous Region of Madeira and the local services dependent on it.

However, this regime was not immediately implemented, as article 2 of the same Decree-Law No. 18/2005 established that "by regional regulatory decree, an organism shall be created in order to pursue in the Autonomous Region of Madeira the attributions and competences entrusted to the Finance Department of the Autonomous Region of Madeira, abolished by this statute in accordance with paragraph 3 of the preceding article" and article 4 established that "while the new organism of regional scope has not been created, the organizational structures of the Finance Department of the Autonomous Region of Madeira shall be maintained, with the respective personnel assigned functionally to the Regional Secretariat for Planning and Finance".

Subsequently, Regional Regulatory Decree No. 29-A/2005/M, of 31 August, approved the organizational structure of the Regional Tax Affairs Department, providing, in paragraph 1 of its article 1, that "the Regional Tax Affairs Department, abbreviated as DRAF, is the department of the Regional Secretariat for Planning and Finance which has as its general attributions, with respect to its own tax revenues of the Autonomous Region of Madeira, to perform all necessary acts for their administration and management of income taxes, consumption taxes, property taxes and other legally provided taxes, as well as to execute the policies and fiscal guidelines defined by the Regional Government in tax matters".

However, article 46 of the same statute established that "until all the logistical means necessary to exercise the fullness of competences and attributions provided for in articles 1 and 2 of this statute are installed, the DGCI, through its departments and services, will continue to ensure the carrying out of procedures in administrative matters necessary to exercise the attributions and competences transferred to the Autonomous Region of Madeira, including those relating to the assessment and collection of taxes that constitute own revenue of the Autonomous Region of Madeira".

In the same line, Regional Legislative Decree No. 27/2008/M, of 3 July, which approved the organic and functional adaptation of national tax legislation to the Autonomous Region of Madeira, although it established that the references made in the Corporate Income Tax Code to the General Directorate of Taxes, in matters that fall within the attributions and competences of the Autonomous Region of Madeira, were to be understood as referring to the Regional Tax Affairs Department (article 2, paragraph 1), it established in its article 15 that "the legislative adaptation made by this regional legislative decree is made without prejudice to the provision of article 46 in Regional Regulatory Decree 29-A/2005/M, of 31 August, a statute that approved the organization of the Regional Tax Affairs Department".

Subsequently, Regional Regulatory Decree No. 2/2013/M, of 1 February, which approved the Organization of the Regional Tax Affairs Department, attributed to it, in its article 3, the competence to ensure the assessment and collection of income taxes, with respect to its own tax revenues, in its article 12, paragraph 1, established that "until all the logistical means necessary to exercise the fullness of the attributions and competences provided for in article 2 of this statute are installed, the Tax Authority, through its departments and services, will continue to ensure the carrying out of procedures in administrative and IT matters necessary for the exercise of attributions and competences transferred to RAM, including those relating to the assessment and collection of taxes that constitute own revenue of RAM".

This regime was maintained at the time the acts in question in the present case were performed, as concluded from the recent Regional Regulatory Decree No. 14/2015/M, of 19 August, which, in its article 15, paragraph 1, establishes that "until all the logistical means necessary to exercise the fullness of the attributions and competences provided for in article 2 of this statute are installed, the Tax Authority, through its departments and services, continues to ensure the carrying out of procedures in administrative and IT matters necessary for the exercise of attributions and competences transferred to the Autonomous Region of Madeira, including those relating to the assessment and collection of taxes that constitute own revenue of the Autonomous Region of Madeira".

It is concluded, therefore, that the fact that it is a regional surcharge does not prevent the understanding that it is the Tax Authority and Customs Authority that administers it, and therefore the nature of the tax does not exclude the jurisdiction of the arbitral tribunals functioning in CAAD.

On the other hand, in cases where the assessment act whose declaration of illegality is requested in the arbitration proceedings was performed by the Tax Authority and Customs Authority, there is no obstacle to the intervention in the arbitration proceedings of its highest-ranking officer, namely for the performance of an act of one of the types provided for in article 13, paragraph 1, of RJAT ("revocation, ratification, reform or conversion of the tax act whose illegality was raised, performing, when necessary, a replacement tax act"). In fact, the legality of this intervention by the highest-ranking officer of the service is assured by Order No. 112-A/2011, since the Minister of Finance supervises the services of the Tax Authority and Customs Authority (article 11, paragraph 2, of Decree-Law No. 86-A/2011, of 12 July, with reference to article 4 of Decree-Law No. 205/2006, of 27 October, and taking into account that the references to the General Directorate of Taxes and the General Directorate of Customs and Special Consumption Taxes are understood to be made to the Tax Authority and Customs Authority, by virtue of the provision in article 12 of Decree-Law No. 118/2011, of 15 December).

However, the assignment of competences to the Tax Authority and Customs Authority made in article 12, paragraph 1, of Regional Regulatory Decree No. 2/2013/M is not total, covering only "the carrying out of procedures in administrative and IT matters necessary for the exercise of attributions and competences transferred to RAM, including those relating to the assessment and collection of taxes that constitute own revenue of RAM".

Besides, it would not be understood that the maintenance of the competences of the Tax Authority and Customs Authority would be total, since regional tax administration bodies were created by that statute, in particular the Director of Regional Tax Affairs, who naturally could not but perform, at least, some of the functions included in his competences.

And, in fact, articles 1 and 3 of that Regional Regulatory Decree No. 2/2013/M establish that the Regional Tax Affairs Department is the central service of the direct administration of the Autonomous Region of Madeira that is directed by the Director of Regional Tax Affairs, who is thus the highest-ranking officer of the service.

Among the competences of the Director of Regional Tax Affairs are included, pursuant to article 4, paragraph 2, of that statute, those "which, by virtue of the application of the codes and other tax legislation, are entrusted to him, or those delegated to him by the member of the regional government responsible for the finance area", which includes the examination and decision of administrative reviews (article 75, paragraph 1, of the Code of Tax Procedure and Process).

On the other hand, beyond the fact that the text of article 12, paragraph 1, of Regional Regulatory Decree No. 2/2013/M, by expressly referring only to assessment and collection, points towards this assignment of competences covering primary acts, it is concluded from paragraph 2 of the same article that this does not cover acts by the Director of Regional Tax Affairs, since it is established here that "the acts performed in accordance with the preceding number shall be subject to hierarchical appeal, to be filed, depending on the applicable procedure, before the member of the regional government responsible for the finance area or the regional director". In fact, since it is not conceivable that hierarchical appeal be decided by the author of the appealed act himself, it is necessary to conclude that among the acts for which the state Tax Authority and Customs Authority is competent, which is referred to in that paragraph 1, the competence to decide administrative reviews is not included, which, in light of the referred article 4, paragraph 2, belongs to the Director of Regional Tax Affairs.

Moreover, the case at hand evidences the application of this regime, since the administrative review of an assessment issued by the Tax Authority and Customs Authority was examined in administrative review by the Director of Regional Tax Affairs.

Now, in cases where the act whose declaration of illegality is requested in arbitration proceedings was performed by the Director of Regional Tax Affairs, it cannot fail to be concluded that one is dealing with a matter not covered by the binding made by Order No. 112-A/2011.

In fact, from the outset, this Order binds to arbitral jurisdiction "services of the Ministry of Finance and Public Administration" (article 1), which is not the case with the Regional Tax Affairs Department.

In fact, the regional tax administration is not dependent on the Government of the Republic, but rather on the Regional Government, which is the superior body of the regional public administration and has the competence to supervise and direct the services and activity of the regional administration [articles 55, 69, subsection e), and 140, paragraph 1, subsection c), of the Political-Administrative Statute of the Autonomous Region of Madeira, approved by Law No. 130/99 of 21 August, and amended by Law No. 12/2000, of 21 June].

For this reason, the Government of the Republic cannot, through a regulatory act, impose on the highest-ranking officer of a service integrated in the regional administration the intervention in the arbitration proceedings inherent to the regime provided for in RJAT (namely, for the performance of acts provided for in articles 13, paragraphs 1 and 2, 17 and 20, paragraph 2).

On the other hand, the RJAT regime itself, which presupposes an initial intervention by the highest-ranking officer of the service for possible "revocation, ratification, reform or conversion of the tax act whose illegality was raised" (Article 13, paragraph 1), rules out the possibility of intervention by the highest-ranking officer of the service of the Tax Authority and Customs Authority in cases where the act whose declaration of illegality is requested was performed by an entity not integrated into the Tax Authority and Customs Authority, namely the Director of Regional Tax Affairs.

In fact, the revocation, ratification, reform and conversion of tax acts are subject to the rules of revocation [article 137 of the Code of Administrative Procedure of 1991 and article 164 of the Code of Administrative Procedure of 2015, applicable by virtue of the provisions in articles 2, subsection d), and 79 of the General Tax Law], whereby such acts can only be performed by their author or by a superior (articles 142, paragraph 2, of the Code of Administrative Procedure of 1991 and 169, paragraph 2, of the Code of Administrative Procedure of 2015) and there is no hierarchical relationship between the Director General of the Tax Authority and Customs Authority and the Director of Regional Tax Affairs, since the latter is the highest-ranking officer of his respective service.

Being so, the binding made by Order No. 112-A/2011 can only cover those primary acts whose competence remained with and was exercised by the Tax Authority and Customs Authority (namely assessment, but also acts of determination of the taxable base or assessable base or patrimonial values), as only this entity (as successor to the General Directorate of Taxes and the General Directorate of Customs and Special Consumption Taxes) is covered by article 1 thereof, which expressly refers to it as covering those "services of the Ministry of Finance and Public Administration".

In the case at hand, as stated, the act of decision on the administrative review, which maintained in the legal order the assessment with new reasoning, was performed by an entity not covered by the binding.

Consequently, it is concluded that the examination of the claim for a declaration of illegality of this act is not included in the jurisdiction of the arbitral tribunals functioning in CAAD.

2.4.3. Constitutionality of the regime of jurisdiction of the arbitral tribunals functioning in CAAD

The Claimant, referring to the lack of jurisdiction, contends that "the acceptance of this exception would be a violation of the principle of effective judicial protection, provided for in article 268, paragraph 4, of the Constitution of the Portuguese Republic, thus allowing the Tax Authority, through deviant and erratic conduct with the constitutional principles in force in the Portuguese legal system, to adopt a series of illegal and unconstitutional conduct in breach of what is set forth in article 266, paragraph 2, of the Constitution".

It is not clear, however, how the limits of the jurisdiction of the arbitral tribunals functioning in CAAD can conflict with the right to effective judicial protection, since in relation to any harmful act performed by the state or regional administration, there is the possibility of challenging it, through the state courts.

It is certain, however, that the application of this regime of lack of jurisdiction in a situation where the taxpayer was induced into error by irregular conduct by the tax administration (this will certainly be what the Claimant refers to as "deviant and erratic conduct") and permanently lost the right of contentious challenge of the harmful act could be considered incompatible with the right to effective judicial protection, which presupposes, for the protection to be effective, that it be reasonably within the reach of those injured, which must be understood to only occur in situations where the administration has performed the acts provided for in law to ensure the complete clarification of the recipients, for if the law provides for them, it is necessarily because they are presumed as necessary to achieve the intended purpose.

In the case at hand, it is noted that there did occur, in fact, a set of irregularities and procedural inconsistencies that are likely to have affected the possibility of the Claimant identifying perfectly the act whose declaration of illegality it should request and having wrongly opted for arbitral jurisdiction.

In fact, the joint conduct of the Tax Authority and Customs Authority and the Regional Tax Affairs Department shown in the record was manifestly anomalous, in particular by the following facts:

• in the assessment, prepared by the Tax Authority and Customs Authority and which served as the basis for the enforcement procedure, reference was made to "state surcharge", but, in the administrative review, it came to be decided that, after all, it was a matter of "regional surcharge", but the enforcement already instituted on the basis of that previous assessment was maintained;

• being an IRC assessment that constitutes revenue of the Autonomous Region of Madeira, the Tax Authority and Customs Authority did not include in the assessment the respective reference, which should have been made, as it was possible, and, in these conditions, was imposed by article 140, paragraph 3, of the Political-Administrative Statute of the Autonomous Region of Madeira and by article 61, paragraph 4, of Organic Law No. 2/2013, of 2 September (which approved the Law of Finance of the Autonomous Regions);

• the assessment carried out by the Tax Authority and Customs Authority was notified without being preceded by any tax procedure (at least it was not proven that there had been);

• the assessment was notified by the Tax Authority and Customs Authority while an inspection procedure relating to the assessment of the same situation was pending, carried out by the services of the Regional Tax Affairs Department;

• in the notification of the final report of the said tax inspection, carried out after the assessment was notified by the Tax Authority and Customs Authority, it was announced by the Regional Tax Affairs Department that an assessment would be prepared (which would have as its basis that it was a matter of regional surcharge, not state surcharge), which did not come to pass;

• in the notification of the decision on the administrative review, the "means of defense and period to react against the notified act" were not indicated, which is required by article 36, paragraph 2, of the Code of Tax Procedure and Process;

• in the decision on the administrative review, no reference is made to the revocation of the previous assessment, nor was a new assessment issued with the new legal classification and calculation of the respective interest, stating that "the exigibility of the amount of €1,370,522.40, due as regional surcharge and which is already being collected under the Tax Enforcement Procedure …2014…" is maintained;

• the initial assessment remained in enforcement, despite the fact that, on 29-10-2014, before the decision on the administrative review, the Regional Tax Affairs Department sent the Claimant a communication that a correction would be made to the assessment, in the sense that came to be adopted in the decision on the administrative review (document No. 6 attached with the request for arbitral decision).

In this context, in which an unusual quantity of procedural irregularities was gathered, the error of the Claimant in challenging an assessment, which was not expressly revoked, but rather was indicated to it as remaining exigible in the tax enforcement already pending, despite the classification of the tax to be collected being changed by the decision on the administrative review, is understandable.

For this reason, it is understood that the error of the Claimant in formulating the request for arbitral decision having as its subject the assessment No. 2014 … is explained, in terms of reasonableness, by the deficiency of information referred to, and therefore cannot be considered imputable to the Claimant, for the purposes of article 24, paragraph 3, of RJAT.

In fact, the irregularities attributable to the Regional Tax Affairs Department appear to be decisive in inducing the Claimant into error, by making a notification of the decision on administrative review without indication of the means of reaction available, by not making a new assessment in formal terms despite considering that the amount referred to in the assessment as "state surcharge" should be maintained as "regional surcharge" and by deciding to maintain the tax enforcement procedure already instituted on the basis of the previous assessment, despite its assumptions being altered.

Being so, the right of contentious challenge provided for in this norm remains assured, and therefore the decision of lack of jurisdiction of this Arbitral Tribunal does not conflict with the right of contentious challenge guaranteed by article 268, paragraph 4, of the Constitution.

2.5. Issues with impeded knowledge

Given the exception of lack of jurisdiction raised by the Tax Authority and Customs Authority, its acceptance is required, with the dismissal of the proceedings [article 278, paragraph 1, subsection a), of the Code of Civil Procedure, subsidiarily applicable by virtue of the provision in article 29, paragraph 1, subsection e), of RJAT], and therefore the examination of the remaining issues raised in this case is impeded.

3. Decision

On these grounds, this Arbitral Tribunal agrees to:

• Judge the exception of material lack of jurisdiction of this Arbitral Tribunal to be well-founded;

• Dismiss the Tax Authority and Customs Authority from the proceedings;

• Declare that the acceptance of the exception does not result from conduct imputable to the Claimant.

4. Case Value

In accordance with the provision in article 306, paragraph 2, of the Code of Civil Procedure, article 97-A, paragraph 1, subsection a), of the Code of Tax Procedure and Process, and article 3, paragraph 2, of the Regulation of Costs in Tax Arbitration Proceedings, the case is valued at €1,424,879.07.

5. Costs

Pursuant to articles 12, paragraph 2, and 22, paragraph 4, of RJAT, the costs are fixed at €18,972.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Claimant.

It is clarified that, although it is understood that the error of the Claimant in using the request for arbitral decision to seek the declaration of illegality of the assessment is not imputable to it, no responsibility for costs can be attributed to the Tax Authority and Customs Authority, as it was not the latter, but rather the Regional Tax Affairs Department (currently the Tax Authority and Tax Affairs of the Autonomous Region of Madeira, pursuant to Regional Regulatory Decree 14/2015/M, of 19 August) that made the deficient notification.

On the other hand, the Claimant opposed, without success, the exception of lack of jurisdiction raised by the Tax Authority and Customs Authority, which is sufficient to justify its condemnation to costs.

Lisbon, 02-11-2015

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(João Sérgio Ribeiro)

(A. Sérgio de Matos)

[1] On revocation by substitution, reference may be made to the judgment of the Tax Disputes Section of the Supreme Administrative Court of 6-10-1999, case No. 23379, published in Appendix to the Official Journal of 30-9-2002, page 3102, and the judgments of the Administrative Disputes Section of the Supreme Administrative Court of 29-5-2002, case No. 47541; of 18-12-2002, case No. 48366; of 29-4-2003, case No. 363/03; of 28-5-2003, case No. 533/03; of 25-2-2009, case No. 843/08.