CAAD 254/2018-T: VAT Additional Assessments Annulled for Expiry of Assessment Right and Lack of Reasoning

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (President Arbitrator), Luís Cupertino Ferreira and António Pragal Colaço, appointed by the Deontological Council of the Centre for Administrative Arbitration to form an Arbitral Tribunal, hereby decide as follows:

I – REPORT

1. On 18 May 2018, A... – Sociedade Unipessoal Lda., NIPC..., with registered office at ..., Lot..., ..., ...-... Lisbon, filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011 of 20 January, which approved the Legal Regime of Arbitration in Tax Matters, as amended by Article 228 of Law No. 66-B/2012 of 31 December (hereinafter abbreviated as LRAT), seeking the declaration of illegality of the following acts:

a. Additional assessment of Value Added Tax (VAT), No. 2018..., of 08-01-2018, in the amount of € 22,255.25 and respective statement of account adjustment No. 2018..., with payment deadline of 19-02-2018, relating to the 1st quarter of 2013;

b. Additional assessment of Value Added Tax (VAT), No. 2018..., of 08-01-2018, in the amount of € 12,021.57, and respective statement of account adjustment No. 2018..., with payment deadline of 19-02-2018, relating to the 2nd quarter of 2013;

c. Additional assessment of Value Added Tax (VAT), No. 2018..., of 08-01-2018, in the amount of € 30,964.20, and respective statement of account adjustment No. 2018..., with payment deadline of 19-02-2018, relating to the 3rd quarter of 2013;

d. Additional assessment of Value Added Tax (VAT), No. 2018..., of 08-01-2018, in the amount of € 21,339.82, and respective statement of account adjustment No. 2018..., with payment deadline of 19-02-2018, relating to the 4th quarter of 2013;

e. Assessment of interest No. 2018..., of 08-01-2018, in the amount of € 4,024.23, and respective statement of account adjustment No. 2018..., with payment deadline of 19-02-2018, relating to the 1st quarter of 2013;

f. Assessment of interest No. 2018..., of 08-01-2018, in the amount of € 2,051.24, and respective statement of account adjustment No. 2018..., with payment deadline of 19-02-2018, relating to the 2nd quarter of 2013;

g. Assessment of interest No. 2018..., of 08-01-2018, in the amount of € 4,974.63, and respective statement of account adjustment No. 2018..., with payment deadline of 19-02-2018, relating to the 3rd quarter of 2013; and

h. Assessment of interest No. 2018..., of 08-01-2018, in the amount of € 3,208.57, and respective statement of account adjustment No. 2018..., with payment deadline of 19-02-2018, relating to the 4th quarter of 2013;

all in the total amount of € 100,839.51 (one hundred thousand, eight hundred and thirty-nine euros and fifty-one cents).

1. To support its request, the Claimant alleges, in summary:

a. Expiration of the right to assess;

b. Lack of reasoning of the Tax Inspection Report and the VAT assessment acts;

c. Illegality of the assessment of compensatory interest.

1. On 21-05-2018, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.

2. The Claimant did not appoint an arbitrator, whereupon, pursuant to the provisions of Article 6(2)(a) and Article 11(1)(a) of the LRAT, the President of the Deontological Council of the CAAD appointed the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable time period.

3. On 10-07-2018, the parties were notified of these appointments and did not manifest any intention to refuse any of them.

4. In accordance with Article 11(1)(c) of the LRAT, the collective Arbitral Tribunal was constituted on 30-07-2018.

5. On 01/10/2018, the Respondent, duly notified for this purpose, submitted its response defending itself by exception and by challenge.

6. Pursuant to Articles 16(c) and (e) and Article 29(2) of the LRAT, the holding of the meeting referred to in Article 18 of the LRAT was waived.

7. Having been granted a time period for submission of written submissions, these were presented by the parties, pronouncing themselves on the evidence produced and reiterating and developing their respective legal positions.

8. It was indicated that the final decision would be notified by the end of the time period provided for in Article 21(1) of the LRAT, which time period was extended by two months by order of 28-01-2019, pursuant to Article 21(2) of the said LRAT.

9. The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with Articles 2(1)(a), 5, and 6(2)(a) of the LRAT.

The parties have legal personality and capacity, are legitimately interested and are legally represented, in accordance with Articles 4 and 10 of the LRAT and Article 1 of Ordinance No. 112-A/2011 of 22 March.

The proceedings do not suffer from nullities.

Therefore, there is no obstacle to consideration of the merits of the case.

Having considered all of the above, we hereby decide:

II. DECISION

A. FACTUAL MATTERS

A.1. Facts Established as Proved

1. By means of Service Order No. 0I2016..., the present Claimant was subject to an external inspection procedure, which covered the period of 2013.

2. On 26/10/2016 the signature of the official, superior hierarchical to the tax inspectors responsible for the inspection procedure, was affixed, which determined the performance of the inspection acts, as provided for in Article 46(2) of the Administrative Tax Procedure Code.

3. The inspection file was delivered to the responsible technical officer on 09/11/2016.

4. The said service order was signed by the Certified Accountant of the Claimant on 03-07-2017.

5. The Claimant was notified of the Draft Tax Inspection Report to, within a period of 15 (fifteen) days, exercise the right to prior hearing, which it did on 10-11-2017.

6. Following the Tax Inspection, the corresponding final report was prepared, which contains, among other things, the following:

[Content of report not fully detailed in translation]

1. The said report was forwarded to the Claimant by letter No. ..., dated 28/11/2017, sent by registered mail with acknowledgment of receipt (CTT registration No. ... PT), signed on 29/11/2017.

2. The Claimant was notified to submit a Request for Review of the Taxable Matter, which it did not do.

3. Subsequently, the Claimant was notified of the corresponding tax assessments and compensatory interest assessments arising from the said Tax Inspection Report, issued on 08/01/2018, which constitute the subject matter of the present arbitral process.

4. From all assessments of compensatory interest the following data appear:

[Content of interest data not fully detailed in translation]

1. The Claimant did not pay the said assessments.

A.2. Facts Established as Not Proved

1. That the Service Order referred to in point 1 of the facts established as proved was notified to the Claimant on 26-10-2016, or a copy thereof.

2. That the Claimant did not submit a Request for Review of the Taxable Matter due to reasons beyond its control.

A.3. Reasoning for Factual Matters Proved and Not Proved

With respect to the factual matters, the Tribunal is not required to pronounce on all that was alleged by the parties, but rather has the duty to select the facts that matter for the decision and to discriminate between matters proved and not proved (see Article 123(2) of the Tax Procedure Code and Article 607(3) of the Code of Civil Procedure, applicable by virtue of Article 29(1)(a) and (e) of the LRAT).

Accordingly, the facts relevant to judgment of the case are chosen and delimited according to their legal relevance, which is established in light of the various plausible solutions to the question(s) of Law (see former Article 511(1) of the Code of Civil Procedure, corresponding to the current Article 596, applicable by virtue of Article 29(1)(e) of the LRAT).

Thus, having regard to the positions assumed by the parties, in light of Article 110(7) of the Tax Procedure Code, the documentary evidence and the file attached to the proceedings, the facts listed above were considered proved, with relevance to the decision, taking into account that, as stated in the Decision of the South Administrative Court of 26-06-2014, in case 07148/13, "the probative value of the tax inspection report (...) may have probative force if the assertions contained therein are not contested".

The facts established as not proved result from the absence of proof in this regard and, in the case of the fact established as not proved in point 1, from the existence of indications to the contrary, namely, the reference in the file (p. 23) that the process was delivered to the technical officer on 09/11/2016, and in the written hearing submitted by the Claimant, that the process was suspended for 269 days after 26-10-2016, that is, that from this date and during that period there was no activity whatsoever, which will include the submission of the Service Order to the Certified Accountant of the Claimant for signature.

In its submissions, the Claimant appeals to the Tribunal to, pursuant to the inquisitorial principle, request all elements it deemed convenient from the Tax Authority. However, having been granted throughout the arbitral process all opportunities to produce or request the evidence it deemed fit, this Tribunal considers it has nothing further to determine in the matter in question.

Allegations made by the parties and presented as facts, consisting of strictly conclusive statements, insusceptible to proof and whose truthfulness must be assessed in relation to the concrete factual matters consolidated above, were neither established as proved nor as not proved.

B. LAW

a. Preliminary Matter

In its submissions, the Respondent argued the untimeliness of the Claimant's submissions, considering that "the parties were notified by electronic mail on 2018-12-04, such notification is presumed to have been effected on 2018-12-07, the third day after the date of preparation and dispatch of the order, in light of Article 248 of the current Code of Civil Procedure, applicable by virtue of Article 29(1)(e) of the LRAT, in the absence of clear rules governing the matter in the latter statute."

Thus, still in the words of the Respondent, "the deadline for submission of the Claimant's submissions expired on 2018-12-17", given that "the Claimant submitted its written submissions on 2018-12-18, thus exceeding the 10-day period set by the tribunal."

Whilst the Respondent's assertion is, evidently, pertinent and well-founded, the fact is that pursuant to Article 39(10) of the Tax Procedure Code and Article 8(3) of Decree-Law No. 93/2017, "Notifications effected to the electronic tax address are deemed to have been effected on the fifth day after registration of their availability in the system supporting the public service of electronic notifications associated with the single digital address or in the electronic mailbox of the person to be notified."

In the present case, the notification of the order for submission of submissions was effected by means of Post Office (CTT).

Thus, on 18-12-2018, the date on which the Claimant submitted its submissions, the period granted to it for this purpose had not yet expired, therefore such submissions should be admitted.

b. Matters of Exception

i. Lack of Material Competence

In its response, the Respondent begins by noting that "the determination of the taxable matter was ascertained by the tax inspection services through the use of indirect methods."

Given this circumstance, the Respondent concludes that "this is an evident lack of material competence of the Tribunal to consider the part of the arbitral claim identified above, which constitutes a dilatory exception that prevents consideration of this claim and leads to dismissal of the instance as to the claim in question, in accordance with Article 576(2) and Article 577(2)(a) of the Code of Civil Procedure, applicable by virtue of Article 29(1)(e) of the LRAT".

At issue is the content of Articles 2(1) of the LRAT, and 2(b) of Ordinance No. 112-A/2011 of 22 March, the content of which is as follows:

• Article 2(1) of the LRAT: "The competence of arbitral tribunals includes consideration of the following claims:

a) Declaration of illegality of tax assessments, self-assessments, withholdings at source and advance payments;

b) Declaration of illegality of acts determining the taxable matter when such does not give rise to assessment of any tax, acts determining the taxable income and acts establishing property values."

• Article 2(b) of Ordinance No. 112-A/2011: "The services and bodies referred to in the preceding article are bound to the jurisdiction of arbitral tribunals operating in the CAAD whose purpose is to consider claims relating to taxes whose administration is entrusted to them referred to in Article 2(1) of Decree-Law No. 10/2011 of 20 January, with the exception of the following: (...)

b) Claims relating to acts determining taxable income and acts determining the taxable matter, both by indirect methods, including the decision of the review procedure;"

With due respect to other opinions, it is believed that the Respondent's contention is not correct in this matter.

In fact, the subject matter of the present arbitral action consists of VAT assessment acts, the competence to consider their legality is conferred upon this Arbitral Tribunal by Article 2(1)(a) of the LRAT, and is not excluded by Article 2 of the Ordinance, particularly by its subsection (b).

And, as the Claimant points out, one thing is the act of determining the taxable matter, the legality of which has been excluded from consideration by Article 2(b) of the Ordinance, and another is the act of assessment.

Being the case that, by virtue of the principle of unitary challenge, the act determining the taxable matter should be challenged when challenging the assessment act, this does not result in one and the other being the same act.

Therefore, in a parallel situation, in light of Article 86 of the General Tax Code, the jurisprudence has already clarified that:

"1. By virtue of the agreement reached in the review committee and in light of Article 86(4) of the General Tax Code, the appellant, now respondent, is legally prevented from challenging the assessment on the ground of the illegality of resort to indirect methods due to lack of adequate reasoning, in fact and in law, of the respective decision.

1. Not questioning the performance of the expert appointed by her in the review committee or the preparation of the agreement reached therein, she is bound by the terms of the same agreement, and therefore cannot challenge the assessment on the basis admitted in the decision appealed against given that it is contained within the limits and scope of the agreement reached.

2. Only grounds not contained in the agreement, that is, which are not linked to or associated with it, may therefore be invoked."

Or, stated differently:

"The measure of the unchallengeable nature of the assessment made on the basis of the agreement, having its rationale in the existence of this agreement, must be restricted to what was the subject matter thereof, which is the measure of the taxable matter. Therefore, the existence of an agreement cannot preclude the taxpayer's right to challenge the assessment made on the basis of the agreement for any reason not linked to it, such as, for example, defects of form (lack of reasoning, lack of competence, violation of procedural rights) or violation of law (such as error in the applicable rate or regarding the existence of a total or partial exemption)."

Therefore, having "the challenged assessment resulted from the simultaneous application of indirect methods and technical corrections (direct assessment), and the challenger questioned both the application of these methods and the technical corrections made, imputing to the challenged tax acts defects of failure to comply with the legal formality of prior hearing provided for in Article 60 of the General Tax Code and failure to comply with formalities, with respect to these grounds, the challenge of the assessment is not dependent on the prior request for review of the taxable matter."

This is furthermore confirmed by the doctrine that has examined tax arbitration disputes, cited by the Claimant.

In the present case, although, as indicated by the Respondent, the taxable matter was determined by indirect methods, the present arbitral action does not concern the legality of that determination act, as presupposed by Article 2(b) of the Ordinance, but solely the subsequent assessment acts, for defects that are peculiar to them, a matter with respect to which there is no doubt that this Arbitral Tribunal has competence to pronounce upon.

Therefore, this is not a case analogous to that decided (correctly) in arbitral case 359/2017T, cited by the Respondent, since there it had been invoked "error in the assumptions for using and in the quantification of indirect methods", which is not the case here.

Therefore, and for all the reasons stated above, the Respondent's exception of lack of material competence of this Arbitral Tribunal should be rejected.

ii. Non-Existence of Request for Review of Taxable Income

The Respondent further contends that the Claimant "was always required to file a request for review of the taxable income, in accordance with Article 91 of the General Tax Code, which it did not do, as it itself acknowledges and as evidenced by the elements attached to the proceedings", and therefore "constituting the review procedure of taxable income under Article 91 of the General Tax Code a condition of judicial challengeability, founded on error in the quantification or in the assumptions for application of indirect methods, its absence results in both the verification of the assumptions of the indirect assessment and the taxable income, consequently fixed, becoming settled or decided matters."

As has already been seen above, it is settled and consolidated jurisprudence, for many years, that the non-existence of a review request merely precludes the possibility of challenging the legality of the act fixing the taxable income or taxable matter, as well as its assumptions, but not other defects, particularly of a formal nature, that the subsequent assessment act may suffer.

Therefore, this exception raised by the Respondent should also be rejected.

c. Merits of the Case

i. Expiration of the Right to Assess

The Claimant begins by raising the expiration of the Tax Authority's right to assess the taxes in question in these proceedings.

For this purpose, it alleges that the inspection procedure carried out, and evidenced in the factual matters established as proved, began on 26/10/2016 and was suspended for more than 6 months.

However, the Claimant is not correct in this regard.

As also results from the factual matters, the service order and the order to commence the external inspection action were notified to the Claimant, in the person of its certified accountant, on 03/07/2017.

As VAT for the year 2013 is in question, the time limit for expiration of the right to assess it would expire, in light of Article 45(4) of the General Tax Code applicable, on 01/01/2018.

Nevertheless, by virtue of the said notification of the service order relating to the inspection procedure, and by Article 46(1) of the General Tax Code, that time limit was suspended and resumed its running with the notification of the final inspection report, by registered mail with acknowledgment of receipt signed on 29/11/2017.

Thus, taking into account such suspension, the Tax Authority's right to assess the tax in question had not yet expired at the time of notification of the assessments that are the subject matter of the present arbitral action, and furthermore, the deadline for payment thereof, as acknowledged by the Claimant itself, expired on 19-02-2018, that is, before the expiration of the time limit for assessment, calculated in accordance with the aforementioned norms, the period of suspension generated by the pendency of the inspection action.

Moreover, as mentioned, it being not proved that any service order relating to the said inspection action was signed on 26-10-2016, contrary to what the Claimant alleged, there will be no violation of Article 266(2) of the Portuguese Constitution as argued by the same.

The Claimant, in its submissions, referred to the fact that the notice letter was sent to it in November 2016, and that since the inspection action only commenced in July 2017, the "statutory time limits" would have been exceeded, with bad faith and abuse of power on the part of the Tax Authority.

With respect to the question of "statutory time limits" referred to by the Claimant, it is considered that these were complied with, particularly with respect to the time limit provided for in Article 49(1) of the Tax Inspection Procedure Code. As for the maximum period of 30 days to commence the inspection action, which the Claimant, by doctrinal reference, bases on Article 23(1) of the Tax Procedure Code, it is understood that no such requirement exists, particularly by virtue of this norm, which refers to time periods to be fixed by the Tax Authority or by the Tribunal, the deadline for sending the notice letter and for commencing the inspection action not being reducible to either of those two situations.

This does not result, contrary to what the Claimant alleges, in the inspection action remaining pending indefinitely, inasmuch as as long as it has not commenced, the time limit for expiration will continue to run normally, and once this limit is reached without the action having commenced, its commencement will be prejudiced.

Finally, no violation of good faith or abuse of power is discernible in the situation described, which are moreover not substantiated by the Claimant, it being noted that good faith is binding in both directions, and if the Claimant understood that the delay between delivery of the notice letter and commencement of the inspection action affected the legality thereof, in compliance with good faith, it should have immediately opposed the performance thereof, or at the very least, in exercising its right of hearing, made the Tax Authority aware of such circumstance.

Therefore, and for all the reasons stated, it is considered that expiration of the Tax Authority's right to assess the tax in question in these proceedings has not been established, and the arbitral claim should accordingly be rejected in this respect.

ii. Lack of Reasoning

The Claimant also alleges that the acts that are the subject matter of the present arbitral action suffer from a defect of form due to lack of reasoning, since the values stated in the Tax Inspection Report as VAT to be additionally assessed do not correspond to the values assessed.

As is known, reasoning is a requirement of tax acts in general, being a constitutional requirement (Article 268 of the Portuguese Constitution) and a legal requirement (Article 77 of the General Tax Code).

Briefly, it may be said that it is now settled in both national doctrine and jurisprudence that the required reasoning must have the following characteristics:

1. Spontaneity: it must always be initiated by the administration, with ex officio reasoning not being admissible;

2. Contemporaneity: it must be contemporaneous with the performance of the act and may not be deferred;

3. Clarity: it must be comprehensible to an average recipient, avoiding polysemic or deeply technical concepts;

4. Completeness: it must contain all essential elements that were determinative of the decision taken. This characteristic breaks down into two requirements, namely: the duty of justification (legal norms and facts – domain of legality) and motivation (domain of discretion or opportunity, when a valuation is required).

Now, if reasoning is, as stated, necessary and mandatory, this cannot and should not be understood in an abstract and/or absolute manner, that is, the reasoning required of a tax act must be that which functionally is in concreto necessary for that act not to present itself to the taxpayer as a pure demonstration of arbitrariness. This, it is believed, is the touchstone of compliance with the duty of reasoning: when, before an average recipient placed in the position of the actual recipient, the tax act presents itself, from the standpoint of reasonableness, as a product of the pure arbitrariness of the Administration, because the factual and/or legal reasons on which it rests are not discernible, the act will suffer from lack of reasoning.

In this same sense, the jurisprudence of the Supreme Administrative Court is oriented, which considers that "Despite the express indication of the legal provision applicable, the required reasoning on the law of the tax act will be sufficient with reference to the relevant legal principles, the applicable legal regime or a determined normative framework, provided that, in any case, it can be concluded that those were known or knowable to a normal recipient placed in the concrete position of the actual recipient." and that "The legal and constitutional requirement of reasoning of the tax act, arising from Articles 268 of the Portuguese Constitution, 77 of the General Tax Code and 125 of the Code of Administrative Procedure, aims primarily at allowing interested parties to know the reasons that led the Administration to act, in order to enable them to make a conscious choice between acceptance of the legality of the act and its contentious challenge."

Article 77(1) of the General Tax Code states thus that: "The decision of the procedure is always reasoned by means of a brief statement of the reasons of fact and law that motivated it, and the reasoning may consist of mere declaration of agreement with the reasons of earlier opinions, information or proposals, including those comprising the report of the tax inspection."

Descending to the specific case, it is verified that the assessment acts in question occurred following an inspection procedure and in accordance with the tax inspection report approved by order, that report containing the grounds for the assessments in question, which the Claimant, since the administrative complaint, demonstrated understanding, taking, in a reasoned manner, the decision not to accept it.

Therefore, it is understood that, considered in the concrete context in which the assessment acts in question were produced in the present proceedings, it will be apparent, to an average recipient placed in the position of the actual recipient, that the grounds thereof are those contained in the inspection report that preceded them, and it is certainly evident that the Claimant understood this very thing.

The situation depicted by the Claimant, moreover, will not be able to be framed in a deficit of reasoning.

In effect, the alleged circumstance of there being a discrepancy between the values stated in the Tax Inspection Report as VAT to be additionally assessed and the values assessed will not be reducible to a deficiency of reasoning, but at most to an error of law or fact, or possibly even to a material error or typographical error, to the extent that it could be reduced to an oversight in transposing the values contained in the Tax Inspection Report into the assessment document.

In other words, it is precisely because there is reasoning (it being immaterial whether this is correct or not as far as its existence is concerned) that permits the Claimant to construct the argument that there would be a discrepancy between the sums determined by the Tax Inspection Report as owing, and those assessed to it.

Nevertheless, and as the Respondent clarified, this is not the case, since the values contained in the assessment act correspond to the values indicated in the Tax Inspection Report.

Therefore, it is true that, as the Claimant refers, the VAT assessment acts in question now amount to the sums of: 2013 1st Q: € 22,255.25, 2013 2nd Q: € 12,021.57, 2013 3rd Q: € 30,964.20, 2013 4th Q: € 21,339.82; whereas the VAT values stated in the Tax Inspection Report are as follows: 2013 1st Q: € 22,809.53, 2013 2nd Q: € 21,256.54, 2013 3rd Q: € 27,365.70, 2013 4th Q: € 25,511.81.

However, as the Respondent points out, and results from the documentation submitted by the Tax Authority, which was duly submitted to the contradictory of the Claimant, the value stated in the assessments corresponds to the corrections made in the inspection procedure, less the input tax credit subsequently verified in all four calculation periods, the respective arithmetic operations having been duly presented to the Claimant.

Therefore, and in light of the above, nothing is to be censured, from the perspective of the duty of reasoning, in the tax acts that are the subject matter of the present proceedings, whether at the legal or constitutional level, with no violation of any of the norms indicated by the Claimant.

iii. Illegality of the Assessment of Interest

Finally, the Claimant alleges that "the Tax Inspection Report is silent as to the assessment of compensatory interest, so that even if the theory of minimal reasoning is admitted, the fact is that the Tax Authority never made reference in the said Tax Inspection Report to the act of assessment to the effect that compensatory interest would be assessed even though by the nature of the tax in question they are included in the assessment" and that "at no moment, in the acts notified, did the Tax Authority demonstrate what the assumptions upon which the assessment of compensatory interest depends are and justified their verification in the case at hand."

Further, the Claimant contends that "in addition to the lack of reasoning of the interest now challenged, it is important to note that the same also suffer from omission of legal formality, due to lack of prior hearing, which is invoked in accordance with and for the purposes of Article 1 of the Code of Administrative Procedure."

The Claimant concludes thus that "the assessment of compensatory interest cannot be maintained, on pain of the Tax Authority being able to collect compensatory interest as if from an assessment post-declaration of taxpayer, substantially reducing the rights of taxpayers."

With respect to the assessment of compensatory interest, the Supreme Administrative Court has held that "The reasoning of an assessment of compensatory interest must make known, at the factual level, the amount of the tax on which the interest accrues, the rate or rates applicable and the period of its calculation." elements which, as results from the factual matters, appear in the notifications that were effected to the Claimant, from which further there appears the mention that compensatory interest is in question "for delay in the assessment of part or all of the tax".

Understood in this manner, it is easy to conclude that, in conjunction with the tax inspection report that preceded it, the assessment notified to the Claimant contains all legally mandatory elements, including its reasoning, and therefore the alleged lack of reasoning should be rejected.

Regarding the omission of the right of prior hearing before the assessment of compensatory interest, in accordance with Article 60(1)(a) of the General Tax Code, it is verified that there exists in the proceedings no element that permits demonstrating that the Claimant has been expressly heard before the conclusion of the tax inspection report, regarding the possibility of assessment of compensatory interest, it being uncontested that these are not an automatic consequence of tax assessment.

With respect to such matter, the Tax Authority sustains the understanding that the assessment of compensatory interest is associated with and dependent upon the assessment of the tax, and that the latter contains the respective essential elements.

Being, evidently, correct what is asserted (and, as was seen previously, certain that the assessment in question contains the respective essential elements), it is no less evident that this has nothing to do with compliance with the duty of prior hearing.

Therefore, in principle, one should conclude that the alleged omission of the duty of prior hearing in the matter in question exists, and the consequent success of the claim in this respect.

Nevertheless, Article 25(2) of the LRAT provides that:

"The arbitral decision on the merits of the claim filed which terminates the arbitral proceedings is still subject to appeal to the Supreme Administrative Court when it is in opposition, as to the same fundamental question of law, with a judgment handed down by the Central Administrative Court or the Supreme Administrative Court."

In this manner, and taking also into account the duty of uniform application of the law (see Article 8(3) of the Civil Code), arbitral tribunals must decide in accordance with what is the settled jurisprudence of the higher courts of the administrative and tax jurisdiction.

On the matter in question, the South Administrative Court has already held that "Compensatory interest functions as a penalty clause for delay in the assessment of the tax, imputable to the taxpayer, becoming integrated in the assessment thereof, where it derives part of its reasoning, in addition to also requiring a separate segment of its own reasoning, but as to its assessment, the law does not require that the Tax Authority proceed to prior hearing of the taxpayer in an autonomous and distinct manner from the hearing regarding the tax from which it stems." and that "Having the Tax Authority heard the taxpayer regarding the tax from which the assessment of compensatory interest stems, it is no longer legally required that it proceed to a new hearing in an autonomous and distinct manner."

In this latter judgment, it may be read, among other things that:

"Returning, again, to the assumptions of the assessment of compensatory interest, as an autonomous assessment, albeit integrated in the tax assessment, it is evident that this must possess a minimum of its own reasoning as regards, first of all, the calculation base, the applicable rate, the period to which it refers, but also and furthermore, as to the blame necessary for its imputability to the liable subject; And it will be by reference to this same reasoning that it must be assessed whether the Administration's power/duty of granting the taxpayer the right of prior hearing is complied with.

• Now, as regards the rate, calculation base and period to which the compensatory interest refers, no margin of discretion is granted to the Tax Authority, which only has and can give effect to what is expressly provided for in the law, that is, as to those assumptions, the action of the Administration consists of a strictly bound procedure, so that its action in such domain is not susceptible to being influenced by any arguments that the appellant could raise, in order to influence the assessment act, by requesting the application of a different rate, or of a different period of time or calculation base, given that these cannot be other than those determined by the applicable legal order.

• And it is evident that the assessing entity, through oversight or for another reason, can take into account, as to such assumptions, elements that are not those to which it should attend; Only that such possible circumstance does not constitute a basis for exercise of the right of prior hearing, rather it is only express and clear reference to the same that must form part of the reasoning of the assessment so that its recipient can, against it react, for breach of law.

• As a consequence and as to these grounds, what is understood is that the liable subject has no right of prior hearing before the assessment of compensatory interest, which is to say that, in this domain, the fact that such right was not granted to him does not constitute, even, any procedural irregularity and still less, with invalidating effects on the final assessment act.

• Already as to blame, as an assumption of the interest in question, it is understood that, as a subjective judgment, it implicitly follows that the taxpayer, in exercise of hearing, can carry into the procedure elements hitherto unavailable to the Tax Authority, which can remove it, in light of the relevant elements to its assessment, in accordance with the aforementioned terms; For this reason that one cannot conclude that the mere fact of the taxpayer's knowledge of the delay in the assessment of the tax, of the applicable rate and of the period, necessarily implies the performance of the assessment act, therefore in this sphere, it is understood, on the one hand, as an essential formality to observe, the notification of the recipient of the final tax act, to exercise, if it wishes, the right of hearing, and on the other, that the omission of such power/duty is insusceptible to degradation into non-essential formality.

• Only that what has just been stated does not mean/imply that reason is on the side of the appellant.

• For as was stated above, blame is a concept of law to be extrapolated from relevant and pertinent factuality, so that its removal passes through demonstration of the lack of adherence to reality of that on which the assessing entity bases that conclusive judgment, by its inadequacy for such purpose starting from the relevant justification susceptible of excluding it.

• Now, in the case of compensatory interest and following the aforementioned, the factuality on which the judgment of blame must be based cannot be other than that which underlies the ascertainment of tax owing, to the exact extent that they become integrated therein, in accordance with Article 35(8) of the General Tax Code.

• But, therefore, if on the one hand it is inexorable that the taxpayer must be granted exercise of the right of prior hearing before the assessment of compensatory interest, on pain of invalidity of this final act, it is equally axiomatic that exercise of this right is satisfied, as to blame, with granting him exercise of this same right before the assessment of the tax to which the compensatory interest relates, since it is there that he must contest the adherence to reality, or justification, of the circumstances of fact that can constitute the basis of that censure judgment.

• Now, "in casu", it is demonstrated that the appellant was granted the right of hearing, with the notification that was made to him of the draft of the inspection action report and from which, as stated in the decision appealed, all the circumstances of fact are recorded that led the Tax Authority to tax him by resort to indirect methodology, as well as the calculation criteria of the "quantum", which is to say, in line with what was stated above, that no other notification had to be made to him to grant him exercise of prior hearing, by reference specifically to the assessment of compensatory interest, whether because such formality is to be considered complied with by the notification that, for this same purpose, was made to him with reference to the tax, or because, as to the remaining assumptions of assessment of compensatory interest, they constitute a strictly bound conduct of the Tax Authority."

This understanding was confirmed by the Supreme Administrative Court which also held that:

"being the taxpayer heard in any of the stages of the procedure – in the case the appellant was notified to pronounce on the conclusions resulting from the inspection action, as set out in facts (B) through (F) of the evidence – it should only be heard before assessment in the case of invocation of new facts on which it had not already pronounced.

The contested judgment does not state that new facts were invoked.

However, the appellant, in the conclusions of its counter-submissions, came to say that in the assessment "new elements" were considered, given that the assessment contains compensatory interest and from the said draft of corrections there was no prior mention of such compensatory interest.

The truth, however, is that the assessment of compensatory interest cannot be considered a "new fact" for purposes of the right of hearing, particularly because the same varies according to the period of time to be considered.

By "new fact" should be understood that which may determine the alteration of the tax, corrections, etc. The assessment of interest translates only into a mere arithmetic operation so that by itself it does not justify the right of hearing.

In this manner, even if at the time of the invitation to exercise the right of hearing the compensatory interest was not assessed, the Tax Administration was not obliged to hear the appellant again merely because compensatory interest was subsequently assessed."

Therefore, it must be considered that by means of notification to the Claimant for exercise of the right of hearing on the Tax Inspection Report relating to the tax on which compensatory interest subsequently came to be assessed, it sufficiently complied with its duty of prior hearing as to this, and the arbitral claim should accordingly be rejected in this respect as well.

C. DECISION

In these terms, this Arbitral Tribunal decides to wholly reject the arbitral claim filed and, in consequence:

a) Absolve the Respondent of the claim;

b) Maintain in the legal order the tax acts that are the subject matter of the present arbitral action; and

c) Condemn the Claimant for the costs of the proceedings, in the amount fixed below.

D. Value of the Proceedings

The value of the proceedings is set at € 100,839.51, in accordance with Article 97-A(1)(a) of the Tax Procedure and Process Code, applicable by virtue of Articles 29(1)(a) and (b) of the LRAT and Article 3(3) of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The amount of the arbitration fee is set at € 3,060.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Claimant, given that the claim was wholly unsuccessful, in accordance with Articles 12(2) and 22(4) of the LRAT and Article 4(5) of the said Regulation.

Let notification be made.

Lisbon, 20 March 2019

The President Arbitrator

(José Pedro Carvalho)

The Arbitrator Member

(Luís Cupertino Ferreira)

The Arbitrator Member

(António Pragal Colaço)