Summary
Full Decision
ARBITRAL DECISION
Report
A – General
A..., taxpayer no. ..., resident at Street ..., ..., ..., ... – ... Lisbon, (hereinafter designated "Claimant"), filed, on 19.01.2018, a request for constitution of a singular arbitral tribunal in tax matters, which was accepted, seeking the declaration of nullity of the act of additional assessment of Personal Income Tax (hereinafter "IRS"), for the year 2016, identified with number 2017..., in the amount of € 6,123.53 (six thousand one hundred and twenty-three euros and fifty-three cents).
Pursuant to the provisions of subparagraph a) of no. 2 of article 6 and subparagraph b) of no. 1 of article 11 of Decree-Law no. 10/2011, of 20 January, in the version given to it by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council of the Administrative Arbitration Center (CAAD) appointed the undersigned as arbitrator, and the Parties, after being duly notified, made no objection to such appointment.
By dispatch of 23.01.2018, the Tax and Customs Authority (hereinafter designated "Defendant") proceeded to appoint Mrs. Dr. B... and Dr. C... to intervene in the present arbitral proceedings, in the name and representation of the Defendant.
In accordance with the provision in subparagraph c) of no. 1 of article 11 of Decree-Law no. 10/2011, of 20 January, in the version given to it by article 228 of Law no. 66-B/2012, of 31 December, the Arbitral Tribunal was constituted on 27.03.2018.
On the same day 27.03.2018, the highest-ranking official of the Defendant's service was notified to, if willing, within the period of 30 days, submit a response, request production of additional evidence and attach to the proceedings a copy of the administrative file.
On 26.04.2018, the Defendant submitted its Response and attached the administrative file.
B – Position of the Claimant
The Claimant declared and paid on the date legally foreseen her IRS for the year 2016 in the amount of € 17,266.51 (seventeen thousand two hundred and sixty-six euros and fifty-one cents).
The Defendant initiated a discrepancy proceedings with reference ..., lot..., number..., having verbally informed that it intended that a new declaration and copy of documents of acquisition and sale of a real property located in ..., ..., ..., ...-... Lisbon (the "Property"), sold in 2016 and the respective capital gain considered as income of that same year, be presented.
The Claimant, through her accountant, delivered to the Finance Service of Lisbon ... the requested documents and delivered a new declaration and an explanatory table of the source of the discrepancies and how they should be resolved.
The Defendant, on 14.09.2017, communicated to the Claimant the existence of discrepancies consisting in the non-substantiation of all expenses and charges (for not fitting the framework of article 51 of the IRS Code), accepting only the amount of € 10,301.25 (ten thousand three hundred and one euros and twenty-five cents) relating to real estate brokerage, inviting her to present a replacement declaration.
In the exercise of her right to prior hearing, by letter received in the services on 12.10.2017, the Claimant explained her position, namely, regarding the consideration of the value she presented as being that of acquisition of the Property and reaffirmed the right to deduction of half of the expenses presented.
Meanwhile, on 29.09.2017, the Claimant presented a new declaration which gave rise to assessment 2017..., in the amount of € 19,042.20 (nineteen thousand and forty-two euros and twenty cents).
The Defendant, on 17.10.2017, again notified the Claimant of the existence of discrepancies, stating that the non-presentation of deeds of acquisition, alienation and documents of declared expenses would originate the correction of the declaration, considering only the values known to AT (Tax Authority), which warranted a new explanation from the Claimant.
The Defendant considered the situation regularized but issued an unofficial declaration which gave rise to an IRS assessment in the amount of € 23,713.07 (twenty-three thousand seven hundred and thirteen euros and seven cents).
The Claimant understands that the assessment now contested violates the rules of competence established in no. 5 of article 65 of the IRS Code ("CIRS"), because it was issued by the Head of Finance and not by the District Director, presents no reasoning, as required by the Constitution of the Portuguese Republic ("CRP") and the law, namely article 66 of the CIRS and the Defendant never, throughout the administrative proceedings, pronounced upon the matter alleged by the Claimant in her right to prior hearing, in violation of what is imposed by no. 7 of article 60 of the General Tax Law ("LGT").
The acquisition value of the Property is Esc. 21,000,000.00 (twenty-one million escudos), as stated in a promise to buy and sell contract notarially authenticated, with Esc. 5,000,000.00 (five million escudos) for essential works, corresponding to the Claimant half of that value.
There was no sisa tax payment on the acquisition of the Property, as it was exempt.
Throughout the years, the Claimant bore works of complete reconstruction of the roof, sewage columns, installation of water for the common part, etc., and the expenses of the last twelve years should be considered as deductible.
C – Position of the Defendant
After the Claimant presented her Declaration Model 3/IRS for the year 2016, a discrepancy proceeding was opened for the following reason: "The non-presentation of deeds of acquisition, alienation and documents of expenses declared in the said declaration originates the correction of the declaration considering only the values known to AT, namely those contained in the dec. m/11 or in the property tax register (patrimonial values)".
At the prior hearing, the Claimant attached a copy of the public deed of acquisition of the Property and the promise to buy and sell contract that preceded it, appearing in both documents that the purchase price was the amount of Esc. 16,500,000.00 (sixteen million five hundred thousand escudos).
The purchase of the Property was subject to payment of sisa tax, and such tax was assessed, in accordance with the legal provisions then in force, on the amount of Esc. 16,500,000.00 (sixteen million five hundred thousand escudos), as can be seen from the sisa receipt no. ... of 30.06.1994.
The Claimant also submitted a document issued by the condominium administration to justify the expenses and charges of the Property relating to monthly quotas from November 1996 to July 2013 and from August 2013 to March 2016 and extraordinary expenses for common works of the building in the amount of € 10,002.00 (ten thousand two euros) - to which corresponds € 5,001.00 (five thousand one euros), that is, 50% as the Claimant is owner of only half of the Property.
The declaration issued by the condominium administration with which the Claimant intends to demonstrably show the declared expenses does not constitute sufficient proof, as she did not attach a single invoice or receipt of payment.
The Defendant maintains that of the expenses and charges presented, only those relating to real estate brokerage are substantiated, in the amount of € 10,301.25 (ten thousand three hundred and one euros and twenty-five cents).
Thus, the declaration presented by the Claimant was corrected, considering the following values: i) value of sale: € 167,500.00 (one hundred and sixty-seven thousand five hundred euros); ii) acquisition value: € 41,150.83 (forty-one thousand one hundred and fifty euros and eighty-three cents); and iii) expenses and charges: € 10,301.25 (ten thousand three hundred and one euros and twenty-five cents).
It cannot be accepted that the acquisition value includes a sum - Esc. 4,500,000.00 – for "financing restoration, recovery, and improvements to the said apartment that are already underway and in the final stage of completion".
Nor can it be accepted that in the calculation of capital gains the condominium expenses are considered, in accordance with article 51 of the CIRS, which the Claimant demonstrated through a statement of the condominium administration.
Even if the amounts allegedly directed to common works of the building – and most of the condominium expenses refer only to ordinary maintenance and repair quotas of the building – the Claimant failed to prove that such works actually took place and, much less, their value.
Finally, the Defendant understands that compensatory interest is not owed, because the contested assessment does not suffer from any defect.
D – Conclusion of the Report and Purging of Defects
The Claimant, by subsequent request for extension of the claim, further requests the condemnation of the Defendant to refund the improperly charged tax, added to a set of expenses incurred within the framework of the tax enforcement proceedings no. ...2018..., including default interest, expenses and court fees and expenses relating to the provision of guarantee in the form of voluntary mortgage (registration at the Land Registry, Stamp Duty and notarial deed), totaling € 6,692.61, to which it understands that compensatory legal interest should be added counted from the date of payment until actual receipt.
Following the Response, on 27.04.2018, the Defendant came to offer into the proceedings a copy of the sisa receipt no. ... of 30.06.1994, which demonstrates that the acquisition of the property in question was subject to the said sisa tax and that this was assessed at the value of the deed, that is, at the value of Esc. 16,500,000.00 (sixteen million five hundred thousand escudos).
Invited to pronounce on the document referred to in 1.31, the Claimant said that:
She did not have nor ever had an emigrant savings account, and could not be a beneficiary of the legislation inherent to it;
The sisa receipt no. ... does not concern the Claimant, but only her spouse;
There being no other sisa receipt beyond the aforementioned receipt no. ..., the provision of no. 2 of article 46 of the CIRS should be applied.
On 09.05.2018, the Claimant requested the attachment to the proceedings of documentation that the previous day had been received and which she considers of interest for the assessment of the merits of the case, calling attention to the fact that the elements sent had "relevant deficiencies and irregularities", which she does not specify.
The documentation alluded to in 1.33 consists of office no. ..., dated 24.4.2018, by which the Head of the Finance Service of Lisbon ... informs the Claimant that the declared elements were not substantiated, referring to her decision of 17.11.2017 (change of the acquisition value of the property and that of the expenses).
By dispatch of 21.09.2018, in accordance with no. 2 of article 21 of the Legal Regime of Arbitration in Tax Matters ("RJAT"), the arbitral tribunal extended by two months the deadline for issuing the respective decision.
On 01.10.2018, the Claimant responded to the clarifications requested by the arbitral tribunal, reiterating that the acquisition of the Property had occurred for a total amount of Esc. 21,000,000.00 (twenty-one million escudos) and that for the acquisition of the Claimant's part of the Property there was no sisa tax payment.
On 03.10.2018, the Defendant, under the principle of contradiction, stated that, in the present case, there was sisa payment, having no relevance, for purposes of the proceedings, whether the Claimant's husband was or was not a beneficiary of sisa tax exemption, as he did not, in fact, benefit from such exemption. And that sisa was paid in accordance with the declared value of Esc. 16,500,000.00, being this the basis for sisa taxation, in accordance with no. 1 of article 46 of the CIRS, it is this value that is the acquisition value for purposes of subparagraph a) of no. 1 of article 10 of the same statute.
Moreover, the Defendant states that the expenses allegedly incurred by the Claimant had the sole purpose of preserving the value of the property and not its increased appreciation, understood as something that must result in an increase in value and not in mere maintenance or preservation of value, as decided by the Supreme Administrative Court decision, Case no. 0587/11, of 21 March 2012 and whose existence cannot be demonstrated by the attachment of a mere statement of the condominium administration nor even by draft minutes.
By dispatch of 04.10.2018, having the Claimant waived the examination of the witnesses she had called, the arbitral tribunal waived the meeting provided for in article 18 of the RJAT, as it understood that the Parties had already brought to the proceedings the factual elements necessary and sufficient for issuing the decision, which was foreseen could take place by 26.11.2018, having invited the parties to, if willing, submit arguments.
On 09.10.2018, the Claimant came to request a deadline for submission of copies of the minutes whose drafts she had attached to the proceedings.
On 23.10.2018, the Defendant submitted its arguments, reiterating the position it had already defended.
On 24.10, in turn, the Claimant submitted its arguments, insisting on the defense of the application to the facts of the proceedings of the provision of no. 2 of article 46 of the CIRS and on the idea that works deliberated by the condominium owners should be considered as charges for appreciation of the property.
The Arbitral Tribunal is materially competent, in accordance with the provision in articles 2, no. 1, subparagraph a) of the RJAT.
The Parties enjoy legal personality and capacity and have standing in accordance with article 4 and no. 2 of article 10 of the RJAT, and article 1 of Ordinance no. 112-A/2011, of 22 March.
The proceedings do not suffer from any nullity.
Matter of Fact
2.1. Proven Facts
The Claimant and her spouse entered into on 02.03.1994 with the commercial company then owning the Property a promise to buy and sell contract that had as object the Property, in which by the second clause the promised price of Esc. 16,500,000.00 (sixteen million five hundred thousand escudos) was established – a copy of this contract is in the administrative file attached to the proceedings.
In the third clause of that same promise to buy and sell contract it was established that the aforementioned price was increased by the amount of Esc. 4,500,000.00 (four million five hundred thousand escudos) to finance restoration, recovery and improvement works to the Property.
The Claimant acquired, by public deed executed on 04.07.1994, together with her spouse, in joint tenancy and equal shares, the Property – a copy of this deed is in the administrative file attached to the proceedings.
The purchase price of the Property, as expressly stated in the public deed referred to in 2.1.3, was "sixteen thousand five hundred contos", that is, Esc. 16,500,000.00 (sixteen million five hundred thousand escudos), equivalent to € 82,301.65 (eighty-two thousand three hundred and one euros and sixty-five cents), corresponding to € 41,150.83 (forty-one thousand one hundred and fifty euros and eighty-three cents) the half acquired by the Claimant.
The acquisition of the Property was preceded by the assessment and payment of sisa tax, on 30.06.1994, at the Finance Office of the ... Tax District of Lisbon, with the respective Declaration Term presented by Mr. D..., in the capacity as business manager of the acquirers, who declared as purchase value Esc. 16,500,000.00 (sixteen million five hundred thousand escudos), equivalent to € 82,301.65 (eighty-two thousand three hundred and one euros and sixty-five cents) and that the "acquisition is made under Decree-Law no. 140-A/86 of 14 JUN and other complementary legislation, in accordance with the declaration of the respective Credit Institution which remains on file, being the value – balance – of the SAVINGS-EMIGRANT account of Esc. 5,500,000.00." – a copy of this sisa receipt was attached to the proceedings by the Defendant.
From November 1996 to March 2016, the Claimant and her spouse paid € 6,273.00 (six thousand two hundred and seventy-three euros) in monthly condominium quotas, as appears in the statement of the condominium administration of the building in which the Property is located, dated 09.05.2017 – a copy of this statement is in the proceedings.
In 2005 and 2013 the Claimant and her spouse paid globally € 3,729.00 (three thousand seven hundred and twenty-nine euros) in extraordinary quotas to finance common works of the building, as appears in the statement of the condominium administration of the building in which the Property is located, dated 09.05.2017 – a copy of this statement is in the proceedings.
The condominium relating to the building in which the Property is located deliberated, on 30.08.2005, as appears from minutes no. 10, the execution of works on the front façade of the building and on the lateral wall and also the installation of the stairs to access the roof, all in the total value, already with VAT, of € 22,475.75 (twenty-two thousand four hundred and seventy-five euros and seventy-five cents), to be divided equally by each of the fourteen units, falling to each of them € 1,605.41 (one thousand six hundred and five euros and forty-one cents) – a copy of these minutes was attached to the proceedings by the Claimant.
Minutes no. 19, of the meeting of the general assembly of the same condominium held on 20.04.2015, notes that the following works were carried out in the building: i) roof recovery, which cost € 10,786.56 (ten thousand seven hundred and eighty-six euros and fifty-six cents); ii) repair of the two entrance doors of the building, which cost € 1,801.40 (one thousand eight hundred and one euros and forty cents); and iii) replacement and cleaning of gutters, insulation of balcony doors and skylight, which cost € 1,760.00 (one thousand seven hundred and sixty euros) – a copy of these minutes was attached to the proceedings by the Claimant.
The permillage of the Property, within the framework of the horizontal ownership of the building, is 120.55 – information collected in the minutes referred to in 2.1.9.
The Claimant alienated, by public deed executed on 11.03.2016, together with her spouse, the Property – a copy of this public deed is in the administrative file attached to the proceedings.
The price for which the Property was sold, as can be read in the public deed referred to in 2.1.11, was € 335,000.00 (three hundred and thirty-five thousand euros), with the Claimant receiving half of that value, that is, € 167,500.00 (one hundred and sixty-seven thousand five hundred euros).
The sale of the Property referred to in 2.1.11 involved the participation of a real estate broker, as appears in the respective public deed.
The Claimant submitted her Declaration Model 3/IRS, for the year 2016, having declared in Annex G ("Capital Gains and Other Patrimonial Increases") the onerous alienation of the Property, in the following terms:
Value of sale (in March 2016): € 167,500.00 (one hundred and sixty-seven thousand five hundred euros);
Acquisition value (in June 1994): € 52,373.73 (fifty-two thousand three hundred and seventy-three euros and seventy-three cents) and expenses and charges of € 15,174.61 (fifteen thousand one hundred and seventy-four euros and sixty-one cents).
The Defendant initiated a discrepancy proceeding, notified to the Claimant, following which the deduction of the amount of € 10,301.25 (ten thousand three hundred and one euros and twenty-five cents) relating to the commission charged by the real estate brokerage agency that had participation in the alienation process of the Property was accepted, but other expenses and charges declared by the Claimant in Annex G of the IRS Model 3 for 2016 were disregarded.
On 17.11.2017, the Head of the Finance Service of Lisbon –..., issued a dispatch in accordance with the information and opinion presented to her and in which the following can be read, in particular:
"OF THE FACTS:
The Right of prior hearing in accordance with article 60 of the LGT, appears to be timely, so we will proceed with its analysis.
The SP [Subject] intends, by exercising this right, that there be considered as Acquisition Value € 52,373.73 (50% of the value of the Promise contract).
It likewise intends that there be considered as Expenses and charges the amount of € 15,174.61.
By No. 1 of article 46 of the CIRS "… if the real property has been acquired for consideration, the value served for purposes of assessment of the municipal tax on onerous transactions of real property (IMT or Sisa) is considered as acquisition value. Thus, the SP's claim finds no acceptance, as it does not fit within the said article, being substantiated by this understanding through assessment of Sisa (receipt No. ... of 30/06/1994, ... Tax District Lisbon), which applied to 16,500,000.00, corresponding in euros to € 82,301.65, total value, corresponding to 50% to € 41,150.83.
Regarding the second point, the document lists [sic] monthly condominium quotas and extraordinary amounts for conservation and maintenance of the building, not having been accompanied by the respective invoices passed to the Condominium, which makes it impossible to measure against what is provided in article 51 of the CIRS.
Thus, as Expenses and Charges will be accepted the amount € 10,301.25 relating to real estate intermediation.
In these terms, in view of the above and faced with the data provided, we are of the opinion that the claim deserves partial grant of conservation expenses [sic] in the amount of € 10,301.25, and with the acquisition value of € 41,150.83, and the remainder of the proposed corrections should be maintained in the legal order.
On 22.11.2017, the services of the Defendant proceeded to correct the detected discrepancies, via completion of an unofficial declaration/DC, in which the following was considered: i) value of sale: € 167,500.00 (one hundred and sixty-seven thousand five hundred euros); ii) acquisition value: € 41,150.83 (forty-one thousand one hundred and fifty euros and eighty-three cents); and iii) expenses and charges: € 10,301.25 (ten thousand three hundred and one euros and twenty-five cents).
Following the aforementioned unofficial correction, an IRS assessment no. 2017... was issued in the name of the Claimant, for the year 2016, in the total amount of € 23,713.07, from which resulted the additional amount to be paid of € 6,123.53, now contested.
On 08.02.2018 tax enforcement proceedings no. ...2018... were instituted against the Claimant, for the amount of € 6,123.53, to which was added default interest of € 34.22 and expenses and court fees of € 109.89.
To suspend the enforcement proceedings, the Claimant provided guarantee by constitution of voluntary mortgage, incurring the following expenses: (i) registration at the Land Registry - € 255.00; (ii) stamp duty - € 47.96; and (iii) notarial deed - € 146.47.
2.2. Unproven Facts
It was not proven that there was no sisa tax payment on the acquisition of the Property, as is stated in article 21 of the request for arbitral pronouncement, nor that the additional IRS assessment contested was paid. There are no other facts relevant to the assessment of the merits of the case that have been given as unproven.
2.3. Justification for the Determination of the Matter of Fact
The facts were given as proven based on the assessment and valuation of the documents attached to the proceedings by the Parties (namely the minutes, budgets and statement of the condominium administration, it being certain that neither the Claimant must have in her possession the invoices relating to works carried out on the building nor the condominium is subject to organized accounts, nor to specific requirements of record-keeping and documentary support) and on the positions assumed by them in the pleadings submitted.
Matter of Law
3.1. Questions to be Decided
It results from what has been stated above that the questions to be assessed are, in essence, the following:
Whether the assessment contested violates the rules of competence established in no. 5 of article 65 of the CIRS, because it was issued by the head of the finance service and not by the district director;
Whether the contested assessment suffers from the defect of lack of reasoning, in which case its validity would be tainted;
Whether there was omission of pronouncement on the arguments put forth by the Claimant throughout the entire administrative proceedings;
What should be the acquisition value of the Property, for purposes of application of article 46 of the CIRS;
Which expenses and charges should be added to the acquisition value of the Property, in accordance with and for purposes of the provision in subparagraph a) of article 51 of the CIRS; and, finally,
Whether, should the request for annulment of the contested assessment act be judged as partially upheld, the Claimant, within the framework of the present arbitral proceedings, may obtain the condemnation of the Defendant to payment of compensatory interest relating to the amount she allegedly paid to satisfy the tax obligation improperly charged by the Defendant and also be compensated for the amounts she paid within the framework of the enforcement proceedings (interest, expenses and court fees), including all expenses incurred with the provision of guarantee, in the form of voluntary mortgage (registrations, stamp duty and deed) with which she sought to suspend the execution.
3.2. The Subsequent Extension of the Claim
Before proceeding to analyze the questions raised by the Claimant's claim, it is important to assess the possibility of that claim being extended in the course of the proceedings, since the Claimant subsequently to the request for arbitral pronouncement requested the condemnation of the Defendant to refund the amount subject to execution allegedly paid and also the expenses she incurred with tax enforcement (compensatory and default interest and expenses and court fees) or with its suspension (registration, stamp duty and deed for constitution of voluntary mortgage).
The extension of the object of the proceedings also concerns facts relating to the additional assessment contested, constituting, as is well observed in the arbitral decision that terminated proceedings no. 25/2018-T, the development or consequence of the original claim, of partial invalidity of the assessment act, as the tax enforcement proceedings still derives from that act.
It is important to emphasize, as did the decision we have just referred to, that, with the exception of the claim for refund of court fees charged in the tax enforcement proceedings, the additional claims deduced fall within the cognition powers of arbitral tribunals, delimited by analogy with the action for judicial review, in accordance with the legislative authorization granted by article 124 of Law no. 3-B/2010, of 28 April, materialized in article 2, no. 1, subparagraphs a) and b) of the RJAT, whereby they encompass, in addition to the principal claim, the assessment and declaration of illegality of compensatory and default interest, the condemnation to payment of compensatory interest (article 43 of the LGT) and indemnification for improper provision of guarantee (article 53 of the same statute).
Thus, the extension of the claim in the manner it was requested by the Claimant is to be admitted, in accordance with the provision in articles 63 and 86 of the Code of Procedure of Administrative and Tax Courts ("CPTA") and articles 264 and 588 of the Code of Civil Procedure ("CPC"), by referral of article 29, no. 1, subparagraph e) of the RJAT and article 1 of the CPTA, which, in favor of the principle of procedural economy, accommodate the objective modification of the proceedings when this arises from subsequent facts and closely connected with the principal claim, as is the case here.
3.3. The Incompetence of the Head of the Finance Service
The Claimant alleges that the assessment contested violates the rules of competence established in no. 5 of article 65 of the CIRS, because it was issued by the Head of the Finance Service and not by her District Director.
Article 65 of the CIRS provides, to the extent relevant here, as follows:
Article 65
Bases for the determination, fixing or alteration of income
2 - The Tax and Customs Authority proceeds to fix the set of net income subject to taxation when any of the situations or facts provided for in no. 4 of article 29, in article 39 or in article 52 occurs.
4 - The Tax and Customs Authority proceeds to alter the elements declared whenever, there being no occasion for the fixing referred to in no. 2, corrections must be made resulting from errors evidenced in the declarations themselves, omissions committed therein or corrections resulting from discrepancy in the qualification of acts, facts or documents with relevance to the assessment of the tax.
5 - The competence to undertake the acts of determination, fixing or alteration referred to in this article is exercised by the director of finance in whose area the tax domicile of the taxpayers is located, and may be delegated to other officials whenever the large number thereof justifies it.
In fact, no. 5 of this article provides that the competence to undertake the acts of determination, fixing or alteration referred to therein belongs to the director of finance of the area where the tax domicile of the taxpayers is located. Therefore, competence to undertake these acts should have been exercised by the district director of Lisbon and not by a head of the Finance Service. However, this same provision provides for the possibility of this competence being delegated to other officials, whenever the large number of taxpayers justifies it. Moreover, this possibility of delegation does not constitute any surprising deviation, but rather is a manifestation of the generic principle of delegation of powers (and even subdelegation) enshrined in article 62 of the LGT.
Now, for the defect of incompetence to proceed, it is not sufficient to allege that the act was undertaken, as it was, by the Head of the Finance Service of Lisbon –... and not, as it should have been, by the District Director of Lisbon. It is further necessary to allege that there is no delegation of competences that authorizes the intervention of the superior official of the local peripheral organ of the tax and customs administration.
It happens that this delegation of competences exists, as the Defendant opportunely recalls. The Director of Finance of Lisbon, by Dispatch no. 3332/2017, of 20.12.2016, published in the Official Journal, 2nd series, no. 78, of 20.04.2017, and with effect from 26.11.2015, delegated to the heads of finance the following:
7.10 — The alteration of the elements declared by taxpayers for purposes of IRS, in accordance with nos. 4 and 5 of article 65 of the IRS Code, up to the limit of € 50,000 of tax per year, in cases of tax control actions of non-inspection character, whose service orders are previously opened by the Finance Directorate, namely within the framework of the methodology of "analysis of IRS refund listings" and control of capital gains in IRS, as well as control of tax benefits, with the consequent processing and collection for assessment of correction documents;
Thus, as the threshold referred to in the provision just transcribed is not exceeded, the defect of incompetence alleged by the Claimant does not proceed, being demonstrated that the Head of the Finance Service of Lisbon –... had competence to undertake the act now contested.
3.4. Lack of Reasoning of the Assessment Act
The Claimant alleges that the tax and customs authority failed to comply with article 66 of the CIRS, having presented no reasoning for the assessment now impugned.
Let us then see what article 66 of the CIRS provides:
Article 66
Notification and Reasoning of Acts
1 - The acts of fixing or alteration provided for in article 65 are always notified to taxpayers, with respective reasoning.
2 - The reasoning must be expressed through an exposition, even if brief, of the factual and legal reasons for the decision, the lack of reasoning being equivalent to the adoption of grounds which, by obscurity, contradiction or insufficiency, do not specifically clarify its motivation.
Jurisprudence has been holding that the legal requirement for reasoning of the tax act, resulting in particular from article 268 of the CRP, but also from the specifications of this constitutional principle that we find in article 77 of the LGT and article 66 of the CIRS, aims primarily to allow interested parties to know the reasons that led the Administration to act in a particular manner, so as to enable them to make a conscious choice between accepting the legality of the act and its contentious challenge.
The reasoning of the administrative act must comply with three essential requirements: it must be clear, sufficient and also logical. For reasoning to be considered sufficient, it must be comprehensible to an average addressee, which requires clarity in the factual and legal reasons presented. The comprehensibility of the average addressee, placed in a concrete situation, will therefore be the appropriate criterion for assessing the sufficiency of the reasoning.
As has been noted, the tax act is sufficiently reasoned when it is possible to extract from it the cognitive path followed for its undertaking. It is necessary that the taxpayer be informed of the cognitive and evaluative itinerary of the assessment act, allowing him to know the factual and legal reasons that determined its undertaking. In other words, the reasoning must incorporate the factual and legal elements that allow the addressee of the act to perceive the decision-making iter of the tax administration.
The reasoning of the unofficial assessment sub judice consists of the information prepared by the Finance Service of Lisbon -..., on which the concurrent dispatch of the Head of Finance of 17.11.2017 was based. It is unavoidable to conclude that this information reveals with the required clarity and adequate sufficiency the factual and legal reasons that motivated the unofficial assessment, containing, in accordance with the law, the applicable legal provisions, the qualification and quantification of the tax facts and the operations for determining the taxable matter and the tax. Reading this information makes it possible to understand precisely why the tax administration understands that the acquisition value of the property is not what was declared by the Claimant, also making clear the reasons why it does not accept the quotas for common expenses as appreciation expenses and those for which it only accepts as necessary expenses and charges inherent to the acquisition and alienation of the Property (to be added to the acquisition value for calculation of the capital gain), the commission charged by the real estate agency that had participation in the alienation.
Now, the dispatch of the Head of Finance is of 17.11.2017 and the correction document is of 22.11.2017, both therefore before 05.12.2017, the date of the contested assessment. Therefore, the assessment act was undertaken taking into account the arguments contained in the information and dispatch of the Head of Finance, and it cannot be confused in any way with lack of notification of the grounds or their late notification with the defect of absolute lack of reasoning. The latter harms the act, taints it, making it illegal. The same cannot be said, however, of the lack or delay in notification of this reasoning, which only generates its ineffectiveness, translated in the postponement of the beginning of the counting of reaction periods against such an act. This is the regime that results from no. 6 of article 77 of the LGT and article 37 of the CPPT.
Furthermore, it is also true that the alleged lack of reasoning did not constitute any obstacle to the Claimant sustaining and contending for the illegality of the act, revealing that the Claimant had knowledge of the factual and legal framework on which the tax administration relied at the time it undertook the assessment act.
Therefore, the alleged defect of lack of reasoning of the assessment being analyzed does not proceed.
3.5. Omission of Pronouncement
The Claimant further maintains that the Defendant did not pronounce on the arguments used by her in the exercise of the right to prior hearing, and it is certain that no. 7 of article 60 of the LGT imposes that "the new elements raised in the hearing of taxpayers are mandatorily taken into account in the reasoning of the decision". Now, from the information on which the concurrent dispatch of the Head of the Finance Service of Lisbon -..., of 17.11.2017, was based, it is clear that the position of the Claimant was not only understood by the Defendant, but was weighed by her, even though from the weighing there resulted rejection of the arguments adduced by the Claimant.
Thus, the alleged defect of omission of pronouncement does not proceed.
3.6. The Acquisition Value of the Property, for Purposes of Application of Article 46 of the CIRS
Subparagraph a) of no. 1 of article 9 of the CIRS states that they constitute patrimonial increases, provided they are not considered income of other categories, capital gains, or as read in subparagraph a) of no. 1 of article 10 of the same statute, the gains obtained which, not being considered entrepreneurial and professional income, income from capital or real estate income, result from the onerous alienation of real property rights. No. 4 of the same article provides that the gain subject to IRS is constituted by the difference between the value of sale and the acquisition value of the mentioned real property rights. Thus, the calculation of the taxable capital gain can never dispense with the fixing, for these purposes, of the respective values of sale and acquisition, which should be determined, one and the other, in accordance with the applicable legal rules.
Pursuant to subparagraph f) of no. 1 of article 44 of the CIRS, for the determination of gains subject to IRS, the value of the respective consideration is considered as the value of sale, to the extent relevant to the case at issue. The Property, as is indisputably accepted by the Parties, was alienated by public deed executed on 11.03.2016 for € 335,000.00 (three hundred and thirty-five thousand euros), with the Claimant receiving half of that value, that is, € 167,500.00 (one hundred and sixty-seven thousand five hundred euros).
We must now determine the acquisition value of the Property for purposes of calculating the capital gain.
Article 46 of the CIRS, to the extent relevant here, provides as follows:
Article 46
Acquisition value for consideration of real property
1 - In the case of subparagraph a) of no. 1 of article 10, if the real property has been acquired for consideration, the acquisition value is considered to be that which served for purposes of assessment of the municipal tax on onerous transactions of real property (IMT).
2 - Where there is no occasion for IMT assessment, the value that would serve as its basis is considered, determined in accordance with the proper rules of that tax.
It results from these legal provisions that the first criterion to be taken into account to determine the acquisition value of a real property is that which appears in no. 1: "if the real property has been acquired for consideration, the acquisition value is considered to be that which served for purposes of assessment of the municipal tax on onerous transactions of real property (IMT)" (in this case, sisa). Therefore, if the acquisition was for consideration – as it was – and sisa was assessed – as it was – there is no reason to make use of the criterion to which no. 2 of this article appeals, as this assumes a genuinely supplementary nature.
It is certain that, in the request for arbitral pronouncement, the Claimant maintains that there was no sisa payment on the acquisition of the property as it was exempt. In her arguments, the Claimant says that she did not pay sisa once the assessment of the full amount declared in the deed concerns her co-owner spouse, having been made under specific legislation and in accordance with a status of someone equivalent to an emigrant that only the said person possessed.
It happens that it clearly results from the proceedings that the acquisition of the Property was subject to sisa and that it was assessed, also regarding the share acquired by the Claimant, with the tax applying to the value declared in the public deed of purchase and sale as the price: Esc. 16,500,000.00 (sixteen million five hundred thousand escudos), equivalent to € 82,301.65 (eighty-two thousand three hundred and one euros and sixty-five cents), corresponding to the Claimant's share € 41,150.83 (forty-one thousand one hundred and fifty euros and eighty-three cents).
Thus, as sisa was assessed, as it was, the acquisition value that must be considered for calculating the taxable capital gain is that which served, at the time, for purposes of assessing the sisa tax. There is therefore no doubt that the acquisition value of the Property is what was presented by the Defendant in the unofficial declaration.
3.7. The Expenses and Charges to be Added to the Acquisition Value of the Property, in Accordance with and for Purposes of the Provision in Subparagraph a) of Article 51 of the CIRS
The Claimant understands that the expenses incurred with monthly condominium quotas and extraordinary contributions for conservation works of the building in which the Property is located fit within subparagraph a) of article 51 of the CIRS, whereby they must be added to its acquisition value. They are, in her judgment, expenses indispensable for the appreciation and maintenance of the quality of the property, which is why the expenses of the last twelve years should be considered as deductible.
It is important therefore to analyze what the said provision states:
Article 51
Expenses and Charges
For the determination of capital gains subject to tax, the following are added to the acquisition value:
a) The charges for appreciation of property, demonstrably undertaken in the last 12 years, and the necessary expenses actually incurred, inherent to acquisition and alienation, as well as indemnification demonstrably paid for the onerous waiver of contractual positions or other rights inherent to contracts relating to such property, in situations provided for in subparagraph a) of no. 1 of article 10;
Two types of expenses are relevant to the case sub judice. On the one hand, charges for appreciation of property demonstrably undertaken in the last 12 years. On the other, necessary expenses actually incurred, inherent to acquisition and alienation.
Necessary Expenses Actually Incurred, Inherent to Acquisition and Alienation
As regards necessary expenses actually incurred, inherent to acquisition and alienation, the Defendant accepted to consider the expenses incurred by the Claimant with real estate brokerage, which totaled the amount of € 10,301.25 (ten thousand three hundred and one euros and twenty-five cents), with no others that can be framed within this part of the said provision.
It remains for us to examine the charges for appreciation of property demonstrably undertaken in the last 12 years.
Charges for Appreciation of Property Demonstrably Undertaken in the Last 12 Years
The Claimant understands that the expenses she incurred with works on the building in which the Property is located constitute, for these purposes, charges for appreciation of the Property, and such expenses should be assessed on the basis of an objective and broad criterion, so as to include all structural works that entail improvement of the structure, including doors, walls and roofs. The Defendant, on the other hand, considers that the mentioned extraordinary expenses, intended to finance repair of the roof, interior stairs, windows and the door of the building, are maintenance and repair expenses of the building, which do not fit within the concept of charges for appreciation of property, for purposes of subparagraph a) of article 51 of the CIRS.
It is worth noting what is said in the Arbitral Decision issued in proceedings no. 313/2015-T. It echoes the critical positions assumed by Xavier de Basto and Manuel Faustino regarding an abusively restrictive reading of the open formulation "charges for appreciation of property". In truth, this expression reveals the existence of an indeterminate concept and this indeterminacy needs to be filled. However, nothing in the letter of the law seems to indicate that it was intended to restrict the scope of the norm. Moreover, the deduction of charges – through addition to acquisition value – is a solution that follows from the very plausible principle of net income taxation. In that decision it is stated: "«Not foreseeing the deduction of expenses actually incurred that contribute to the occurrence of income – in this case, to the occurrence of the increase in value of the property that allowed the realization of capital gain, in its alienation – is to violate an economic and technical principle of income taxation». It further criticizes the thesis of increase in intrinsic value, observing that the law does not distinguish between "intrinsic value" and "market value", and such distinction cannot be operationalized via administrative procedures". It seems to go also in this direction the judgment of the Supreme Administrative Court of 21.03.2012, delivered in case 0587/11: "Subparagraph a) of article 51 of the CIRS does not restrict charges for appreciation of property demonstrably undertaken in the last five years, to material or physical appreciations thereof, but rather also encompasses the expenses actually incurred that appreciate them economically".
It can be read in the aforementioned Arbitral Decision issued in proceedings no. 25/2018-T that the "teleology of the deductibility of these expenses in the calculation of capital gains is inscribed in the generic principle that the income subject to taxation must be net income, corresponding to the actual tax capacity acquired, whereby the expenses demonstrably incurred that present an evident or necessary connection with the obtaining of income, even if it is income of a non-recurring, irregular or fortuitous nature, such as is the case with capital gains, should be subtracted from the sale value".
In the case at issue, the Claimant intends to deduct from taxable income the monthly quotas paid to the condominium in the 12 years preceding the sale and also two extraordinary contributions to the condominium, made one in 2005 and another in 2013, to finance works of repair of the roof, stairs, windows and door of the building. This arbitral tribunal concurs with, and for the same reasons as, the Arbitral Decision just cited, which judges that expenses of this nature, of maintenance and conservation of the building, do not fit within the concept of expenses inherent – in the sense of specific, indissociable or inseparable – to the operations of acquisition and alienation of the Property.
It remains to know whether, however, such expenses can be deemed "charges for appreciation of property".
Ordinary Condominium Quotas
From November 1996 to March 2016, the Claimant and her spouse paid € 6,273.00 (six thousand two hundred and seventy-three euros) in monthly condominium quotas, as appears in the statement of the condominium administration of the building in which the Property is located, dated 09.05.2017. These quotas are intended to meet the current and foreseeable charges both for the use and maintenance of the buildings. Even if it is admitted that such ordinary quotas may be partly devoted to repairs and even if it is accepted that such repairs may fit within the concept of "appreciation of property", the truth is that it proves impossible to demonstrate that such interventions actually occurred and, if they occurred, how much they cost. Thus, in the present case, ordinary quotas cannot be qualified as expenses incurred with appreciation of the Property.
Extraordinary Condominium Quotas
As regards extraordinary quotas, a statement of the condominium administration dated 09.05.2017 was attached to the proceedings, according to which the Claimant and her spouse, on two occasions, one in 2005 and another in 2013, paid globally € 3,729.00 (three thousand seven hundred and twenty-nine euros) to finance common works of the building in which the Property is located, of which € 1,864.50 (one thousand eight hundred and sixty-four euros and fifty cents) would be attributable to the share of the Property owned by the Claimant.
In the Arbitral Decision issued in proceedings no. 25/2018-T, it is understood that those works "were limited to the maintenance needs of the building which, given its age (over 200 years) has entailed, over the years, indispensable repairs, namely to the roof, to allow and preserve conditions of habitability (water infiltrations, for example) and prevent its degradation, without having taken on the character of innovation. The expenses thus incurred had the sole purpose of preserving the value of the property and not its increased appreciation, understood as something that should result in an increase in value and not in mere maintenance or preservation of value".
Arriving here, it is worthwhile to revisit the applicable legal provision: "to the acquisition value are added the charges for appreciation of property demonstrably undertaken in the last 12 years". Everything is thus about knowing what should be understood, for these purposes, by "appreciation" of a property. And we cannot lose sight of the fact that this hermeneutical effort does not consist in dissecting a word, with the methodological concern of a linguist, philologist or lexicographer. Legal interpretation must be exactly this: it is interpretation, yes, but always legal interpretation. We interpret a source to discover a norm therein, with the norm being the expression of a requirement of law. But being legal, the hermeneutical exercise cannot fail to assume an eminently practical perspective, in view of the concrete problem whose solution is sought.
What we are called to interpret is a source that aims to reveal a norm applicable to the determination, to the quantification, of taxable capital gains. Now, the income to be taxed as a capital gain should, in principle, be net income, corresponding to the tax capacity actually acquired. A property whose roof lets in water, damaging its habitability, does not have the same economic value as if it had a roof in perfect condition. Thus, expenses incurred in roof repair must necessarily be reflected positively in the economic value of the property and therefore will increase its sale price. There is an indissociable nexus between such expenses and the increase in the price of the property, and therefore it is of elementary reasonableness to understand that such expense was at the origin or contributed to the obtaining of the income itself. Not admitting the deduction of expenses actually incurred that contribute to the occurrence of income ― in this case, to the occurrence of the increase in value of the property that allowed the realization of capital gain, in its alienation ― is to violate an economic and technical principle of income taxation, which only very weighty reasons could justify and would certainly have to be expressly reflected in the legislative text.
The works, improvements, which are at issue here refer to the façade of the building, the lateral wall, the installation of stairs to access the roof, the roof itself, the two entrance doors of the building, the replacement and cleaning of gutters, the insulation of balcony doors and the skylight. As was demonstrated, the Claimant and her spouse paid in extraordinary quotas, globally, € 3,729.00 (three thousand seven hundred and twenty-nine euros) to finance common works of the building in which the Property is located: € 1,700.00 (one thousand seven hundred euros) in 2005 and € 2,029.00 (two thousand twenty-nine euros) in 2013. These are therefore expenses incurred in the relevant time period: the twelve years preceding the alienation of the property.
It is worth noting in any case that charges for appreciation of the property cannot be the amounts paid to the condominium to finance works. They must be the costs incurred with the works themselves. It is they, strictly speaking, that cause the increase in the economic value of the property.
Now, from the condominium minutes that were attached to the proceedings (minutes no. 10 and minutes no. 19) we can determine that, in 2005, even though the Claimant and her spouse made a joint payment of € 1,700.00 (one thousand seven hundred euros), the works carried out cost, as regards the Property, only € 1,605.41 (one thousand six hundred and five euros and forty-one cents). Already in 2013, even though the payment made by the Claimant and her spouse was € 2,029.00 (two thousand twenty-nine euros), the works executed (as can be read in the text of minutes no. 19) was only € 14,347.96 (fourteen thousand three hundred and forty-seven euros and ninety-six cents), of which, in accordance with the permillage of the Property, must be attributed to her € 1,729.65 (one thousand seven hundred and twenty-nine euros and sixty-five cents). Thus, the costs that should be considered as charges for appreciation of the Property amount to € 3,335.06 (three thousand three hundred and thirty-five euros and six cents), of which € 1,667.53 (one thousand six hundred and sixty-seven euros and fifty-three cents) relates to the share of the Property owned by the Claimant.
It is thus the amount of € 1,667.53 (one thousand six hundred and sixty-seven euros and fifty-three cents) that should be added to the acquisition value for purposes of calculating the taxable capital gain.
3.8. Indemnification for Improper Provision of Guarantee
The Claimant also presents a claim for indemnification for improper provision of guarantee.
Claims of this nature are not a novelty at CAAD, with several decisions in the sense of admitting their cognoscibility by arbitral tribunals. As has already been stated briefly, this arbitral tribunal also understands that it can adjudicate on this claim.
Subparagraph b) of no. 1 of the RJAT provides that "the arbitral decision on the merits of the claim that does not allow for appeal or challenge binds the tax administration from the end of the period provided for appeal or challenge, and the latter must, in the exact terms of the finding of the arbitral decision in favor of the taxpayer and until the end of the period provided for execution in the manner of sentences of judicial tax courts, restore the situation that would have existed if the tax act that is the subject of the arbitral decision had not been undertaken, adopting the acts and operations necessary for the effect".
It is not ignored that the legislative authorization granted to the Government by article 124 of Law no. 3-B/2010, of 28 April, on the basis of which the RJAT was approved, determines that the tax arbitral proceedings constitute an alternative procedural means to the proceedings for judicial challenge and to the action for recognition of a right or legitimate interest in tax matters. Even though subparagraphs a) and b) of no. 1 of article 2 of the RJAT found the competence of arbitral tribunals in "declarations of illegality", it seems reasonable to understand that there are comprehended in its competences the powers that in proceedings for judicial challenge are attributed to tax courts, it being certain that in judicial challenge proceedings, in addition to annulment of tax acts, claims for indemnification can be assessed, whether they relate to compensatory interest or to improper provision of guarantees.
In fact, the principle of cognoscibility of indemnification claims, in friendly settlement or in judicial proceedings, is always justified when the harm that is sought to be remedied results from a fact attributable to the tax and customs administration. Manifestations of this principle can be found in no. 1 of article 43 of the LGT and in no. 4 of article 61 of the CPPT.
Specifically regarding indemnification in case of improper guarantee is article 171 of the CPPT, and it is clear from this provision that one can adjudicate on the claim for indemnification in the proceedings in which the legality of the enforceable debt is disputed, which is imposed for reasons of procedural economy, as the right to indemnification for guarantee improperly provided depends on what is decided regarding the legality or illegality of the assessment act. Thus, it is necessary to conclude that the arbitral proceedings must also be deemed appropriate for assessing the claim for indemnification for improperly provided guarantee.
The regime for the right to indemnification for improperly provided guarantee is contained in article 53 of the LGT, which establishes the following:
Article 53
Guarantee in Case of Improper Provision
1. The debtor who, to suspend execution, provides a bank guarantee or equivalent will be indemnified in whole or in part for harm resulting from its provision, if he maintained it for a period exceeding three years in proportion to the favorable outcome in administrative appeal, challenge or opposition to execution that have as object the guaranteed debt.
2. The period referred to in the preceding number does not apply when it is verified, in friendly settlement or judicial challenge, that there was error attributable to the services in the assessment of the tax.
3. The indemnification referred to in number 1 has as its maximum limit the amount resulting from the application to the guaranteed value of the rate of compensatory interest provided for in the present law and can be requested in the own proceedings of friendly settlement or judicial challenge, or autonomously.
(…)
In the case sub judice, as has been stated, the contested assessment act is only partially (and even residually) illegal. Being so, the provision of the guarantee, which here takes the form of voluntary mortgage, if the Claimant's interest had been, as it seems to have been, to suspend the tax enforcement proceedings that was running against her, would always have had to be provided and, in that measure, the respective costs would always have had to be borne by her.
The costs incurred by the Claimant with the issuance of the bank guarantee were (i) registration at the Land Registry - € 255.00; (ii) stamp duty - € 47.96; and (iii) notarial deed - € 146.47. Of those costs, only the one relating to stamp duty seems to vary based on its value. Consequently, this arbitral tribunal understands that the Claimant, only as regards stamp duty, has the right to be indemnified for the harm suffered with the constitution of the mortgage for an amount greater than what should have happened, by however minimal those damages may be.
It will always be important to determine whether the additional costs incurred by the Claimant regarding stamp duty with the constitution of the mortgage exceed the limit fixed in no. 3 of article 53 of the LGT, based on the application to the guaranteed value (in the respective proportion) of the rate of compensatory interest. It is not at this moment possible to determine by what value the voluntary and unilateral mortgage should have been constituted and consequently undertake the necessary arithmetic operation, whereby it will have to be undertaken at a later moment.
Thus, the amount of indemnification to which the Claimant is entitled will have to be determined in execution of the present decision, in accordance with the provision in article 609 of the CPC, applicable by force of subparagraph e) of no. 1 of article 29 of the RJAT.
Decision
In the terms and with the grounds set forth, the Arbitral Tribunal decides:
To judge as partially upheld the request for arbitral pronouncement, condemning the Defendant to consider that the amount of € 1,667.53 (one thousand six hundred and sixty-seven euros and fifty-three cents) is added to the acquisition value for purposes of calculating the taxable capital gain;
To judge as partially upheld the claim for indemnification for guarantee provided for a value greater than that due, condemning the Defendant to pay to the Claimant the indemnification that comes to be determined in execution of the hereby decided;
To judge as unfounded the claims relating to condemnation of the Defendant to refund the tax, compensatory and default interest, as it is not proven that they were paid, as well as the payment of compensatory interest.
Value of the Proceedings
When a tax assessment act is challenged, the value of the cause is that of the amount whose annulment is sought, corresponding to the economic utility of the claim. Thus, in accordance with the provision in no. 2 of article 306 of the CPC, article 97-A of the CPPT and also no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings, the proceedings is fixed at the value of € 6,123.53 (six thousand one hundred and twenty-three euros and fifty-three cents).
Costs
For purposes of the provision in no. 2 of article 12 and no. 4 of article 22 of the RJAT and no. 4 of article 4 of the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is fixed at € 612.00 (six hundred and twelve euros), in accordance with Table I annexed to the said Regulation, to be borne by the Parties in proportion to their respective failure to succeed: 90% (ninety percent) by the Claimant and 10% (ten percent) by the Defendant.
Lisbon, 23 November 2018
The Arbitrator
(Nuno Pombo)
Text prepared by computer, in accordance with no. 5 of article 131 of the CPC, applicable by referral of subparagraph e) of no. 1 of Decree-Law no. 10/2011, of 20 January and with the spelling prior to the said Orthographic Agreement of 1990.
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