Process: 263/2013-T

Date: June 26, 2014

Tax Type: IRS

Source: Original CAAD Decision

Summary

This arbitral decision addresses the indirect assessment of IRS (Personal Income Tax) for the 2006 tax year when the taxpayer failed to file their declaration timely. The Tax Authority initially assessed Category B income of €56,268.17 applying the maximum coefficient of 0.65 under Article 31 of the IRS Code, resulting in tax of €8,248.93. After accepting the taxpayer's married status, the assessment was annulled and replaced with a new liquidation of €22,413.48, which included capital gains from property sale. The taxpayer challenged this on multiple grounds: procedural violations (lack of notification to file the missing return and insufficient reasoning), incorrect coefficient application (arguing 0.20 should apply for goods sales rather than 0.65 for services), and erroneous capital gains calculation. Regarding the property, the taxpayer argued that because the original building was demolished in 2003 and replaced with new construction registered in 2004 with a taxable value of €98,780, this should be the acquisition value rather than the 1992 inheritance value. During arbitration proceedings, the Tax Authority partially reformed the contested act, accepting that the property acquisition date was February 2004 and the acquisition value was €98,780. The Respondent also raised a jurisdictional objection, arguing that CAAD lacks competence to review denials of official revision requests as these are not explicitly covered under Article 2 of the RJAT (Legal Regime of Tax Arbitration). This case illustrates the complexities of indirect assessment procedures, the importance of correctly applying income coefficients based on the actual nature of business activities, and the treatment of substantially improved properties for capital gains purposes.

Full Decision

ARBITRAL DECISION[1]

  1. Report

A - General

1.1. A..., taxpayer no. …, resident in …, at Travessa … (hereinafter Claimant), filed on 25.11.2013 a request for establishment of an arbitral tribunal in tax matters, which was accepted, aiming at the annulment of the assessment of Personal Income Tax (hereinafter IRS) no. 2010... (hereinafter Disputed Assessment).

1.2. Pursuant to the terms of clause a) of no. 2 of article 6 and clause b) of no. 1 of article 11 of Decree-Law no. 10/2011 of 20 January, in the wording given to it by article 228 of Law no. 66-B/2012 of 31 December (hereinafter RJAT), the Deontological Council of the Centre for Administrative Arbitration appointed Nuno Pombo as arbitrator, and the parties, after being duly notified, did not object to such appointment.

1.3. Thus, in conformity with the provisions of clause c) of no. 1 of article 11 of RJAT, the arbitral tribunal was constituted on 27.01.2014.

1.4. On 30.01.2014, the head of the Tax and Customs Administration service (hereinafter Respondent) was notified to, if it so wished, within the period of 30 days, file its reply and request production of additional evidence.

1.5. On 08.01.2014, the Respondent informed the arbitral tribunal that it had proceeded to reform the tax act, in the manner that will be briefly explained below.

1.6. On 28.02.2013 the Respondent filed its reply, and subsequently the order designating Ms. Dr. … and Ms. Dr. … to intervene in the present arbitral proceedings, in the name and representation of the Respondent, was attached to the case file.

1.7. The Claimant, given the exceptions raised by the Respondent in its reply, requested that it be permitted to present in writing its position regarding them, a request which the arbitral tribunal, on 24.04.2014, granted.

B – Position of the Claimant

1.8. The Claimant did not timely file its income tax return for IRS for the year 2006, and the Respondent proceeded to the indirect assessment of the taxable matter, calculating a category B income of € 56,268.17, to which it applied, for the determination of taxable income, the coefficient of 0.65, the highest of those provided for in article 31 of the Personal Income Tax Code (hereinafter designated CIRS), and the assessment no. 2010... was issued in the amount of € 8,248.93.

1.9. The Claimant objected to the assessment referred to in the preceding number, and the Respondent accepted the change of family composition, having been demonstrated that the Claimant was, in fact, married.

1.10. The assessment referred to in 1.8 was annulled by declaration of elimination no. 1 of lot no. ..., dated 02.09.2010, and on 20.12.2010 a new IRS assessment was issued, the Disputed Assessment, in the amount of € 22,413.48 (and not € 22,413.38, as is incorrectly referred to in article 20 of the request for arbitral ruling), with the addition of taxable income that would later be identified as income from capital gains obtained from the alienation of a property.

1.11. The Claimant filed a petition for reconsideration against the Disputed Assessment, arguing that there had been omission of essential formalities, because it had not been notified to file the missing income tax return and violation of the duty to provide reasons, because the concrete grounds for the new indirect assessment had not been communicated.

1.12. The Claimant contends that the Respondent "at the time the effects of a petition for reconsideration took effect", "where the change of the claimant's family composition was granted", could not have proceeded to "successive determination of more income", and that the provisions of article 76 of CIRS should not be applied but rather those of no. 4 of article 65 of the same Code.

1.13. The Claimant, in the petition for reconsideration filed, further alleges that the Respondent proceeded to an erroneous quantification of the real property capital gain, in that it ignored the execution of a building that did not exist at the date of acquisition, and moreover, the coefficient of 0.65 was used in calculating the taxable matter of category B when the applicable one was 0.20, since the operations carried out by the Claimant were sales and not provision of services.

1.14. By order of the Head of Finance of 17.05.2011 the appealed act was upheld and against it the Claimant filed a hierarchical appeal, and the Director of IRS Services denied the appeal by order of 24.04.2012.

1.15. On 09.05.2013 the Claimant filed with the Tax Service of Lisbon 7 a request for revision of a tax act with the Disputed Assessment as its object, in which it reiterates the arguments advanced in the petition for reconsideration and the hierarchical appeal that followed.

1.16. On 31.05.2013 the Claimant paid the tax in question, interest and costs.

1.17. The request for revision referred to in 1.15 did not receive any reaction from the Respondent, so its tacit denial is deemed to have occurred on 09.09.2013.

1.18. The income determined in category B of IRS corresponds to the amounts declared by the Claimant in the periodic declarations of Value Added Tax (hereinafter VAT), to which the highest coefficient of those contained in article 31 of CIRS was applied, when those declarations clearly show the nature of the income obtained, sales of goods and not provision of services, and the Claimant continues the activity of "retail trade in meat – commonly known as butcher shop".

1.19. As for income of category G generated by the alienation of a property owned by his wife, the Claimant contends that she acquired it free of charge by deed of partition of the estate comprising the succession opened by the death of her parents on 02.12.1992, and it is certain that "the property thus acquired was not the same as the one that came to be alienated on 22.05.2006", since in 2003 the existing building was demolished and another building was constructed, and on 12.02.2004 a declaration was filed with the Tax Service of Aguiar da Beira for registration or updating of urban properties in the tax roll, and a taxable property value of € 98,780 was assigned to it, so the Claimant contends this is the acquisition value and that date is when the property was acquired.

1.20. The Claimant further contends that it is entitled to compensation through compensatory interest, calculated on the amount of the tax and corresponding compensatory interest unduly paid, counted from the date of unduly payment until its complete reimbursement.

C – Position of the Respondent

1.21. On 08.01.2014, the Respondent, pursuant to the terms and for the purposes provided in article 13 of RJAT, informed the arbitral tribunal that it recognized that the date and acquisition value of the property in question were not correct, giving, only in that respect, reason to the Claimant, accepting that the property had been acquired in February 2004 and that the acquisition value would have to correspond to the "taxable property value taking into account the new reality communicated through the declaration Form 1 of Municipal Property Tax, that is € 98,780", and consequently ordered the referral of the case to the Finance Directorate of Lisbon "for the appropriate purposes".

1.22. In its reply of 28.02.2014 the Respondent begins by referring, as a preliminary matter, that the assessment act whose annulment the Claimant requests was partially revoked, and this decision was notified to the taxpayer in accordance with legal terms.

1.23. The Respondent contends that the arbitral tribunal lacks jurisdiction to consider the request, since the denial of a request for official revision is not covered by article 2 of RJAT, and it is not possible, in arbitral proceedings, to equate the revision procedure to that provided for in article 131, no. 1 of CCPT, since this equation would violate the rules and general principles of interpretation of laws, and would also constitute a violation of the constitutional principles of the rule of law and separation of powers, as well as of legality, as a corollary of the principle of inalienability of tax claims.

1.24. The Respondent further argues that the request for arbitral ruling is untimely, since the auditable act is not the denial of the request for revision, as the Claimant contends, but the act of additional assessment whose annulment is requested, and the request for arbitral ruling was filed after the 90-day period referred to in no. 1 of article 10 of RJAT.

1.25. The Respondent rejects the Claimant's understanding that the Disputed Assessment suffers from the defect of omission of essential formality, due to lack of reasoning and prior hearing, since the latter was ensured, the Claimant having been notified by registered letter and the former guaranteed in accordance with legally required terms, allowing the Claimant to understand the cognitive path that led to the decision in question, especially since the Disputed Assessment merely adds to the previously notified assessment the compensatory interest due under article 35 of the General Tax Law (hereinafter LGT).

D – Response of the Claimant to the Exceptions Raised by the Respondent in its Reply

1.26. The Claimant, in writing, pursuant to the principle of contradiction, presented its opposition to the exceptions raised by the Respondent in its reply, since they prevent consideration of the merits of the request.

1.27. As to the exception of lack of material jurisdiction, the Claimant contends that what is at issue is "the challenge of a decision regarding a revision of a tax act", arguing that recourse to the arbitral tribunal for the assessment of the illegality of a decision on the revision of a tax act that dealt with the assessment of a tax is covered by clause a) of no. 1 of article 2 of RJAT.

1.28. As for the exception of untimeliness, the Claimant concludes that it is without merit, since the 90-day period referred to in clause a) of no. 1 of article 10 of RJAT is counted from the date of formation of the presumption of tacit denial (article nos. 1 and 2 of the Tax Procedure and Process Code, hereinafter CPPT).

E – Conclusion of the Report

1.29. On 24.04.2014, at 14:00, the first (and only) meeting of the arbitral tribunal with the parties took place, and the arbitral tribunal on that occasion granted the Claimant's request to be permitted to file its written response to the exceptions raised by the Respondent in its reply.

1.30. At the meeting, the arbitral tribunal granted a 10-day period for the Respondent, if it wished, to pronounce itself on that document, which did not happen, and neither of the parties, as the matter involved exclusively law, saw need for carrying out any additional proceedings.

1.31. The parties have judicial personality and capacity and have standing in accordance with article 4 and no. 2 of article 10 of RJAT, and article 1 of Ministerial Order no. 112-A/2011 of 22 March (hereinafter Order).

1.32. The case does not suffer from any nullity, with the conditions being met for the rendering of the arbitral decision. Since exceptions that prevent consideration of the merits of the case have been raised by the Respondent, the invoked exceptions will first be considered, and if they are shown to be without merit, the merits thereof.

  1. Factual Matters

2.1. Proven Facts

2.1.1. The Claimant did not timely file its income tax return for IRS for the year 2006 (article 16 of the request for arbitral ruling).

2.1.2. The Claimant was notified, by registered letter dated 18.06.2007, of this non-compliance, and was invited to regularize its situation (document on page 66 of the administrative file that accompanied the Respondent's reply).

2.1.3. The Claimant did not proceed to such regularization, never having filed its income tax return for IRS for the year 2006.

2.1.4. The Respondent thus proceeded to the indirect assessment of the taxable matter, calculating a category B income (provision of services) of € 56,268.17, to which it applied, for the determination of taxable income, the coefficient of 0.65, the highest of those provided for in article 31 of CIRS (article 16 of the request for arbitral ruling and document on pages 35 and et seq. of the administrative file that accompanied the Respondent's reply).

2.1.5. The Respondent issued on 27.01.2010 the assessment no. 2010..., in the amount of € 8,248.93 (article 17 of the request for arbitral ruling and pages 36 and 1st of pages 70 and 71 of the administrative file that accompanied the Respondent's reply).

2.1.6. The Claimant filed on 19.04.2010 a petition for reconsideration of that same assessment, which was assigned no. ..., for not accepting the consideration that the income it had earned from category B was qualified as provision of services and also for the fact that the Respondent had presumed a family composition consisting only of the Claimant when he was married (articles 4 and 5 of the petition for reconsideration which constitutes document 3 attached to the request for arbitral ruling).

2.1.7. Following that petition for reconsideration, approval was granted of what was requested regarding the change of family composition (article 18 of the request for arbitral ruling and no. 4 of page 27 of the administrative file that accompanied the Respondent's reply).

2.1.8. The assessment referred to in 2.1.5 was annulled by declaration of elimination no. 1 of lot no. ..., dated 02.09.2010 (article 23 of the request for arbitral ruling and 4.1 of page 72 of the administrative file that accompanied the Respondent's reply).

2.1.9. In December 2010 the tax enforcement proceedings that had been initiated based on non-payment of the tax referred to in the assessment mentioned in 2.1.5 was also annulled (article 12 of the request for revision which constitutes document 2 attached to the request for arbitral ruling).

2.1.10. A new IRS assessment was issued on 20.12.2010, numbered 2010..., in the amount of € 22,413.48 (and not € 22,413.38, as is incorrectly referred to in article 20 of the request for arbitral ruling), with the addition of taxable income (article 20 of the request for arbitral ruling and document 1 attached thereto).

2.1.11. The addition of taxable income referred to in the preceding number resulted from the Respondent's consideration of income of category G, capital gains, from the paid alienation of a property owned by the Claimant's spouse.

2.1.12. The Disputed Assessment is in all respects identical to assessment no. 2010...., with the exception of the inclusion of an amount corresponding to compensatory interest (article 61 of the Respondent's reply and 5.1 of page 72 of the administrative file that accompanied that reply).

2.1.13. As relevant to this case, assessment no. 2010.... was issued following the partial granting of the petition for reconsideration filed by the Claimant against assessment no. 2010..., subsequently annulled, as demonstrated, maintaining however the information contained in Annex B of the official declaration of income (document on pages 44 and et seq. of the administrative file that accompanied the Respondent's reply).

2.1.14. The Claimant filed a petition for reconsideration against the Disputed Assessment, arguing that there had been omission of essential formalities, because it had not been notified to file the missing income tax return and violation of the duty to provide reasons, because the concrete grounds for the new indirect assessment had not been communicated to it (article 21 of the request for arbitral ruling and document 3 attached thereto).

2.1.15. By order of the Head of Finance of 17.05.2011 the appealed act was upheld, and against it the Claimant filed a hierarchical appeal, and the Director of IRS Services denied the appeal by order of 24.04.2012 (document 4 attached to the request for arbitral ruling).

2.1.16. On 09.05.2013 the Claimant filed with the Tax Service of Lisbon 7 a request for revision of a tax act with the Disputed Assessment as its object (article 10 of the request for arbitral ruling and document 2 attached thereto).

2.1.17. On 31.05.2013 the Claimant paid the tax in question, interest and costs (document 5 attached to the request for arbitral ruling).

2.1.18. The request for revision referred to in 2.1.16 did not receive any reaction from the Respondent, so its tacit denial is deemed to have been verified on 09.09.2013.

2.1.19. On 08.01.2014, the Respondent, pursuant to the terms and for the purposes provided in article 13 of RJAT, informed the arbitral tribunal that it recognized that the date and acquisition value of the property in question were not correct, giving, only in that respect, reason to the Claimant, thereby ceasing the litigation as far as the erroneous quantification of the alleged income of category G (document on pages 69 and et seq. of the administrative file that accompanied the Respondent's reply).

2.2. Unproven Facts

There are no facts relevant to the rendering of the arbitral decision that should be considered unproven.

  1. Preliminary Matters – In particular, the Exceptions Raised by the Respondent

A – Lack of Material Jurisdiction

3.1. The Respondent contends that the act of denial of official revision is not covered by the clauses of no. 1 of article 2 of RJAT (see article 12 of the Respondent's reply, although imperfectly expressed). In that reply it appears this proposition is based on the conviction that "acts of assessment are only to be considered in arbitral proceedings when preceded by an administrative phase – that of articles 131 to 133 of CPPT", and the request for official revision (articles 14 and 15 of the reply) cannot be included in the exhaustive and limiting enumeration of the legislator.

3.2. As can be seen, the exception of lack of material jurisdiction alleged by the Respondent must be considered in light of the two problems it raises. On the one hand, whether the denial, tacit in the present case, of a request for official revision is covered by article 2 of RJAT. On the other, whether the revision procedure can be equated to that provided in article 131, no. 1 of CCPT, for purposes of arbitrability of the act, although in the case at hand this problem seems displaced or lacking in meaning.

3.3. In truth, in the case sub judice it is not clear that there is great utility in raising the question, which is doctrinally relevant, of the admissibility of equating the procedure of official revision to that provided in article 131, no. 1 of CPPT, since this provision refers to cases of error in self-assessment, which proves to be inapplicable to the contested situation.

3.4. It is clear that at no time does the Claimant petition for a declaration of illegality of an act of self-assessment, withholding at source, or payment on account, so it is unnecessary to provide an answer to the question of whether the procedure of official revision provided in article 78 of LGT is integrated in the "recourse to the administrative procedure" to which clause a) of article 2 of the Order appeals. This understanding of the arbitral tribunal also affects the assessment of the unconstitutionality invoked by the Respondent. This means that if this tribunal is incompetent ratione materiae, it will not be for this reason, but for another.

3.5. The discussion is, however, appropriate regarding whether the denial of a request for official revision is covered by article 2 of RJAT.

3.6. No. 1 of article 2 of RJAT provides as follows:

"1 – The jurisdiction of arbitral tribunals comprises the assessment of the following claims:

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

b) The declaration of illegality of acts of determination of the taxable matter when it does not give rise to the assessment of any tax, of acts of determination of taxable income and of acts of determination of taxable property values;"

3.7. Although no express reference is found in no. 1 of article 2 of RJAT to acts of denial of requests for revision of a tax act, the understanding should be supported that the illegality of an act of assessment affects, with the same defect, the acts that are subsequent to it, in particular the act of denial of a request for revision based on that same alleged illegality.

3.8. Now, it results from the case file that the request for revision presented by the Claimant aimed at an act of assessment that it considered, and considers, illegal. In denying that request for revision, the Respondent formulated a judgment on the illegality of the act of assessment in question, dismissing it. There appears to be no valid reason to remove from the sphere of jurisdiction of arbitral tribunals the requests for declaration of illegality of acts of assessment, when that illegality affects the validity of second-degree tax acts, as is manifestly the case with the denial of a request for revision of a tax act.

3.9. Moreover, the same conclusion is required by the reference that clause a) of no. 1 of article 10 of RJAT makes to nos. 1 and 2 of article 102 of CPPT, since from it no other reading can be made than that included in the sphere of jurisdiction of these arbitral tribunals are all acts susceptible of being the object of judicial challenge, provided they are related to an act of those contained in no. 1 of article 2 of RJAT, as is the case at hand.

3.10. The arbitral tribunal thus holds that, for the reasons invoked by the Respondent and mentioned above, there will be, as it is thought to have been demonstrated, no lack of material jurisdiction of this arbitral tribunal.

3.11. One cannot in any case ignore another problem, although the Respondent has not raised it. This is the question of whether from clause b) of article 2 of the Order results only the exclusion of the jurisdiction of arbitral tribunals regarding "acts of determination of taxable income and acts of determination of taxable matter, both by indirect methods" or whether it also covers acts of assessment that take place on the basis of that determination.

3.12. It is important to answer this question because the jurisdiction of this arbitral tribunal depends on it and, consequently, the possibility of this judicial body to know of the merits of the request. For, under no. 1 of article 16 of CPPT, applicable by virtue of clause a) of no. 1 of article 29 of RJAT, the infraction of the rules of jurisdiction ratione materiae determines the absolute lack of jurisdiction of the tribunal, and this is cognizable ex officio, under the terms of no. 2 of the same provision of CPPT.

3.13. It might be said that the legislator did not intend to include in the exception of binding acts of assessment subsequent to acts of determination of taxable income and acts of determination of taxable matter, both by indirect methods, since if that had been the legislator's intention, it certainly would not have omitted the reference to those acts of assessment. This conviction seems reinforced by the addition to the generic provision already transcribed of the clarifying expression "including the decision of the revision procedure".

3.14. This, however, is not the understanding of this arbitral tribunal. For the act of determination of taxable income and the act of determination of taxable matter, both by indirect methods, have obvious implications for the subsequent act of assessment. Being distinct tax acts, the assessment of one, most often, suggests the assessment of the other, in terms that it can be said that the invalidity of one (that of determination of taxable income or taxable matter, both by indirect methods) carries with it the invalidity of the other (that of assessment). For this reason, the provision of no. 1 of article 62 of CPPT, which imposes the rule that the assessment is to be made in accordance with the decision of the appropriate procedure to which clause b) of article 2 of the Order appeals, causes no surprise, whenever the determination or revision of the taxable matter is to take place through such procedure. In these cases, as will be understood, the act of assessment substantively adds nothing.[2]

3.15. Therefore, the arbitral tribunal holds that it lacks jurisdiction to assess the validity of the act of assessment subsequent to the determination of taxable income or taxable matter by indirect methods if the cause of action is, ultimately, that same determination, which would always happen if the Claimant invoked the excess in quantification of that same determination.

3.16. In the case brought to the attention of this arbitral tribunal there is no failure to petition for the assessment of the quantification of the taxable matter. See, from the outset, article 7 of the request for arbitral ruling, where it expressly states that "in the case at hand, the request for revision concerns an act of assessment that the claimant deems illegal because (…) it was issued (…) with the erroneous quantification of the taxable matter". For the reasons adduced above, the arbitral tribunal holds that it is prevented from knowing of the request to the extent that it is based on the suggested erroneous quantification of the taxable matter, since the indirect object of the request is an act of assessment issued following the determination of the taxable matter by indirect methods, the legislator having removed those acts from its binding to arbitral jurisdiction [article 2, no. 1 and article 4, no. 1, both of RJAT and article 2, clause b) of the Order].

3.17. However, the Claimant does not limit its cause of action to the erroneous quantification of the taxable matter, also alleging the omission of essential formalities, which, in its view, affects the validity of the act of assessment that constitutes the indirect object of the request formulated before this arbitral tribunal. To the contrary, this tribunal holds that the unnamed dilatory exception to which reference was made in the preceding numbers (and which is not, proprio sensu, a typical case of lack of material jurisdiction, since we are rather in the presence of a removal from the binding of the tax administration to arbitral jurisdiction in its jurisdiction, operated normatively) does not cover other causes of action that do not involve the assessment of the determination of the taxable matter by indirect methods or defects peculiar to the tax act (immediate or mediate) placed in question and entirely unrelated to tax acts on which that one may depend.

B - Untimeliness

3.18. The Respondent raises the exception of untimeliness (articles 46 et seq. of its reply), arguing that the "act auditable here (…) could only be (…) the act of additional assessment, whose annulment is requested, and not the act of denial of the request for revision", and it is certain that much time has elapsed since the term of the 90-day period counted from its issuance.

3.19. The Claimant contends (articles 32 et seq. of the document in which it assesses the exceptions raised by the Respondent) that the request made to the arbitral tribunal aims at the "analysis of legality of tax assessment act, albeit not in first instance", and the request was filed before the expiration of the 90-day period, counted from the act of tacit denial.

3.20. The arbitral tribunal does not support the Respondent's understanding. In truth, it does not appear to this arbitral tribunal sustainable that the "act auditable here (…) could only be (…) the act of additional assessment, whose annulment is requested", as this proposition presupposes the non-auditability of the act of tacit denial of the request for revision. As was sought to be demonstrated above, this arbitral tribunal has jurisdiction to assess the legality of the denial of the request for revision, a second-degree act, assessing at the same time the legality of the act of assessment that underlies it.

3.21. Holding, as argued by the Respondent, the dilatory exceptions invoked to be without merit, this arbitral tribunal must assess the merits of the case, limiting this assessment to the alleged omission of essential formalities.

  1. Omission of Essential Formalities and the Powers of Cognition of the Arbitral Tribunal

4.1. As can be concluded from all the foregoing, the arbitral tribunal cannot know of the request in all its aspects, whether due to lack of jurisdiction or due to utility, or supervenient impossibility of the controversy.

4.2. In truth, on 08.01.2014, the Respondent, pursuant to the terms and for the purposes provided in article 13 of RJAT, informed the arbitral tribunal that it understood the Claimant was right in the part in which it alleged the erroneous quantification of income of category G. An allegation, moreover, systematic and iterative, since the Claimant always used the same arguments, although hitherto to no avail, in the different phases in which it drew the Respondent's attention to the illegality of the consideration of such income for purposes of tax assessment. In any event, cognoscibility of the request ceases, due to absence of controversy, in the part relating to income of category G.

4.3. Based on the analysis of the rules of jurisdiction that are imposed on it, the arbitral tribunal concluded that it is prevented from assessing the validity of the quantification of the taxable matter of category B (and of the subsequent act of assessment) since its determination was made using indirect methods, the legislator having removed those acts from its binding to arbitral jurisdiction [article 2, no. 1 and article 4, no. 1, both of RJAT and article 2, clause b) of the Order].

4.4. The arbitral tribunal further understood that its cognoscibility was limited to the other cause of action presented by the Claimant, namely, the omission of essential formalities, a defect which in the Claimant's view affects the validity of the act of assessment that constitutes the indirect object of the request formulated before this arbitral tribunal. However, it is necessary to establish the nexus between that cause of action and the part of the request whose utility of assessment subsists.

4.5. There must therefore be a verification of whether the omission of essential formalities invoked by the Claimant, if it exists, refers to the part of the request that can be assessed – that relating to category B income. If it is not possible to establish that nexus, the tribunal will not be able to conclude that the request is cognizable.

4.6. In articles 32 and following of the request for arbitral ruling, the Claimant refers to the mentioned omission of essential formalities, specifying them as the lack of reasoning of the tax act and prior hearing.

4.7. The Claimant alleges that there was no notification issued by the Respondent pursuant to article 76 of CIRS, for it to present its income tax return.

4.8. Now, it results from the case file, in the part of the request that matters to consider, exactly the opposite. In truth, the Claimant was duly notified to present its income tax return for IRS relating to 2006, which it never did.

4.9. As for the lack of reasoning of the tax act in crisis, it also results from the case file that that defect, if it exists, refers to the determination of higher income (see article 35 of the request for arbitral ruling), due to the addition of capital gains allegedly obtained by virtue of the paid alienation of a property. This understanding is equally shared by the Respondent (see 9 of page 74 of the administrative file that accompanied the Respondent's reply).

4.10. This is to say, in truth, that in the part of the request whose assessment retains its utility, that relating to category B income of the Claimant, no defect of lack of reasoning is alleged by it, especially since it results from the case file that the Claimant, although not agreeing with the Disputed Assessment with respect to category B income, understood the reasons why that act was taken and the grounds on which it was based, and it is evident that it understood the cognitive and evaluative path of the Respondent.

  1. Decision

5.1. In light of the foregoing, this arbitral tribunal decides to hold the exceptions raised by the Respondent unfounded, namely that of lack of material jurisdiction and of untimeliness, and the assessment of the unconstitutionality invoked by the Respondent is rendered moot.

5.2. The arbitral tribunal further decides that it lacks jurisdiction to assess the validity of the act of assessment subsequent to the determination of taxable income or taxable matter by indirect methods, to the extent that the cause of action is that same determination, which occurs when it is invoked, as the Claimant does, the excess in quantification of that same determination, so, in that part, the Respondent is absolved of the instance.

5.3. Since the Respondent came to recognize that the Claimant was right as far as the determination of taxable income of category G is concerned, the tribunal, due to partial utility, or supervenient impossibility of the controversy, decides not to know of the request in that same part, also holding the assessment of the defect of lack of reasoning and the right to compensatory interest rendered moot, since they refer to it, finally holding this situation attributable to the Respondent.

5.4. The tribunal further holds the request unfounded as it relates to the lack of prior hearing of the Claimant, absolvating the Respondent in that part of the request.

  1. Value of the Case

In accordance with the provisions of no. 2 of article 315 of CPC, clause a) of no. 1 of article 97-A of CPPT and also of no. 2 of article 3 of the Rules of Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 25,294.78.

  1. Costs

For the purposes of the provision of no. 2 of article 12 and no. 4 of article 22 of RJAT and no. 4 of article 4 of the Rules of Costs in Tax Arbitration Proceedings, the amount of costs is fixed at € 1,530.00, pursuant to Table I attached to such Rules, to be borne by the parties in proportion to their loss, with such proportion arbitrated at the ratio of 1/3 for the Claimant and 2/3 for the Respondent.

Notify.

Lisbon, 26 June 2014

The Arbitrator

Nuno Pombo

Text prepared on computer, pursuant to article 138, no. 5 of CPC, applicable by reference to article 29, no. 1, clause e) of RJAT.

[1] The drafting of the present arbitral decision follows the spelling prior to the Orthographic Agreement of 1990.

[2] See, in the same sense, and adopting arguments herein embraced, the arbitral decisions issued in the course of cases 17/2012-T and 70/2012-T.

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What happens when a taxpayer fails to submit their IRS declaration and the tax authority applies indirect assessment under Portuguese tax law?
When a taxpayer fails to submit their IRS declaration, the Portuguese Tax Authority may proceed with indirect assessment of taxable income under Article 87 of the General Tax Law (LGT). The authority uses available information to determine the taxable base, typically applying data from other declarations such as VAT returns. In indirect assessments for Category B income, the Tax Authority applies coefficients from Article 31 of the IRS Code to determine net taxable income from gross revenues. The law allows application of the highest coefficient (0.65 for services) when the specific nature of activities cannot be determined, though this can be challenged if the taxpayer demonstrates their activities correspond to a lower coefficient category (such as 0.20 for sales of goods). The taxpayer retains the right to object to the assessment and present evidence supporting different calculations or corrections.
How is the coefficient under Article 31 of the Portuguese IRS Code applied to Category B income in indirect assessments?
Article 31 of the Portuguese IRS Code establishes simplified coefficients for determining net income from Category B activities when taxpayers do not maintain organized accounting. The coefficient is applied to gross income to determine taxable income, with different rates depending on the nature of activities: 0.20 for sales of goods, 0.65 for services, and 0.75 for professional services. In indirect assessments, when the Tax Authority lacks sufficient information about the specific nature of the taxpayer's activities, it may apply the highest applicable coefficient (0.65 or 0.75). However, taxpayers can challenge this by providing evidence that their activities fall under a lower coefficient category. For example, a butcher shop engaged in retail meat sales should receive the 0.20 coefficient for goods sales rather than 0.65 for services, even if the initial assessment applied the higher rate due to lack of proper documentation.
Can a taxpayer challenge an IRS liquidation based on incorrect household composition before the CAAD arbitral tribunal?
Yes, taxpayers can challenge IRS liquidations based on incorrect household composition before the CAAD (Center for Administrative Arbitration) arbitral tribunal. Article 2 of the RJAT establishes that tax arbitration covers disputes related to legality of tax acts, including IRS assessments. Household composition (casado/solteiro) directly affects tax calculation in IRS through joint taxation options, applicable rates, and deductions. In this case, the Tax Authority initially assessed the taxpayer as single, but after objection accepted the married status, annulled the original assessment, and issued a corrected liquidation. When the revised assessment included additional contested elements, the taxpayer could challenge the entire new liquidation before CAAD. However, jurisdictional issues may arise depending on the procedural vehicle used - direct challenges to assessments are clearly within CAAD jurisdiction, while challenges to denials of official revision requests may face jurisdictional objections, as the Respondent argued that such denials are not explicitly covered under Article 2 of RJAT.
What is the procedure for reform of a tax act (reforma do acto tributário) by the Portuguese Tax Authority during arbitration proceedings?
The reform of a tax act (reforma do acto tributário) during arbitration proceedings is governed by Article 13 of the RJAT, which allows the Tax Authority to partially or totally revoke the contested act at any time before the arbitral decision is issued. When the Tax Authority recognizes errors in the challenged assessment, it can spontaneously reform the act by correcting the identified defects. This occurred in this case when, on January 8, 2014, the Respondent informed the arbitral tribunal that it recognized errors in the property acquisition date and value, accepting the taxpayer's position that the property was acquired in February 2004 with a value of €98,780 rather than the 1992 inheritance. The Tax Authority ordered the case referred to the Finance Directorate of Lisbon for appropriate action to implement the reform. This partial reform affects the arbitral proceedings by potentially narrowing the dispute to remaining contested issues. The taxpayer must be formally notified of the reform, and the proceedings continue regarding any aspects not resolved by the voluntary correction.
Under what circumstances can the CAAD annul an IRS liquidation resulting from indirect assessment of taxable income?
CAAD can annul an IRS liquidation resulting from indirect assessment on several grounds: (1) Procedural violations - failure to comply with essential formalities such as notifying the taxpayer to file the missing declaration before proceeding with indirect assessment, or insufficient reasoning explaining the basis for the assessment; (2) Incorrect application of law - misapplication of coefficients under Article 31 of the IRS Code when evidence shows the taxpayer's activities fall under a different coefficient category than applied; (3) Erroneous factual determinations - incorrect calculation of taxable income, such as wrong capital gains calculations due to errors in determining acquisition values or dates, particularly when property improvements substantially alter the asset; (4) Violation of taxpayer rights - failure to provide opportunities for the taxpayer to present evidence or respond to proposed assessments. The tribunal examines whether the Tax Authority properly exercised its assessment powers within legal boundaries, respected procedural guarantees, and correctly applied substantive tax law. However, CAAD jurisdiction may be limited depending on the procedural path taken - direct challenges to assessments clearly fall within its competence, while indirect challenges through revision request denials may face jurisdictional limitations.