Process: 266/2013-T

Date: March 28, 2014

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD Case 266/2013-T concerns a dispute over the IRS taxation regime applicable to a self-employed professional (Category B income) for fiscal year 2012. The taxpayer elected the accounting-based taxation regime in 2007 under Article 28(3) of the Portuguese IRS Code, which under paragraph 5 is valid for three years and automatically renewable. The taxpayer argued she should remain in this regime through 2012. However, the Tax Authority determined that when her gross Category B income exceeded €150,000 in 2010, she became subject to the accounting regime by legal obligation rather than election. Consequently, when her income fell below €150,000 in 2011, the Authority concluded she automatically reverted to the simplified regime in 2012, absent a new election filed by March 31, 2012. The taxpayer challenged the resulting IRS assessment, arguing the Tax Authority's interpretation was contra legem and violated the constitutional principle of taxation based on actual income (Article 104(2) of the Portuguese Constitution). She contended that her original election remained valid through automatic renewal and cited contradictory administrative guidance in Circular 5/2007. The taxpayer sought declaration of illegality of the assessment and compensation under Articles 53 LGT and 171 CPPT for any unwarranted guarantees. The Tax Authority raised preliminary exceptions challenging the tribunal's jurisdiction ratione materiae and ratione hierarchiae, as well as lis pendens. The excerpt provided does not include the tribunal's final decision or detailed reasoning on either the jurisdictional issues or the merits of the taxation regime dispute.

Full Decision

ARBITRAL DECISION

CAAD: Tax Arbitration
Case No. 266/2013 – T
Subject: PIT – Election for taxation regime based on accounting

I – REPORT

  1. A and B, (hereinafter referred to as the Claimants) taxpayers no. … and … , respectively, with tax domicile …, within the territorial scope of the Tax Authority Service of Porto no. 4, presented, on 25-11-2013, pursuant to the provisions of subsection a) of paragraph 1 of article 2 and articles 10 et seq. of Decree-Law no. 10/2011, of 20 January, which approves the Legal Regime for Tax Arbitration (LRTA), in conjunction with subsection a) of article 99 and subsection d) of paragraph 1 of article 102 of the Code of Tax Procedure and Process (CTPP) – applicable by virtue of subsection a) of paragraph 1 of article 10 of the aforementioned decree-law, a request for an arbitral determination, whereby the AT - Tax and Customs Authority (hereinafter abbreviated as "Tax Authority"), is the respondent, in its capacity as successor to the General Directorate of Taxes, with a view to:

  • The declaration of illegality of the PIT assessment (identified in the case file with no. …) relating to the year 2012, due to breaches of law, including constitutional law;

  • The declaration of the Claimants' right to compensation as provided for in article 171 of the Code of Tax Procedure and Process (CTPP) and in article 53 of the General Tax Law, applicable by virtue of paragraph 5 of article 13 of the LRTA, should any guarantee that the Claimants may have presented or will have to present be judged to be unwarranted with a view to the suspension of the enforcement proceedings instituted by virtue of the debt whose legality they contest.

  1. The request for constitution of an Arbitral Tribunal was accepted on 26-11-2013 by His Excellency the President of the CAAD - Centre for Administrative Arbitration (hereinafter referred to as "CAAD"), and the AT – Tax and Customs Authority was notified of the presentation of the aforementioned request on the same date.

  2. The Arbitral Tribunal was constituted on 27-01-2013, which was communicated to the parties on the same date.

  3. On 27-02-2014, the Tax and Customs Authority presented a response in which it raised the exceptions of the Tribunal's lack of competence ratione materiae and ratione hierarchiae and of lis pendens.

  4. On 07-03-2014, a meeting took place at the CAAD's headquarters, as provided for in article 18 of the LRTA.

  5. At this meeting, the distinguished representative of the Claimants made oral submissions on the matter of the exceptional nature raised in its response by the Respondent, and the distinguished representatives also made oral submissions, in turn, on the arguments presented by the former.

  6. Both parties waived the right to present written submissions.

  7. The Claimants alleged, in essence, the following factual framework:

  • Respondent B is a self-employed professional who, in 2007, pursuant to paragraph 3 of article 28 of the Income Tax Code (ITC), exercised the election for classification in the taxation regime based on accounting;

  • According to paragraph 5 of the same provision of the ITC, this election would be valid for a period of three years, automatically renewable for equal periods;

  • Thus, in 2010, Respondent B continued to be classified in the taxation regime based on accounting, and, by virtue of the aforementioned paragraph 3 of article 28 of the ITC, should remain in such regime at least until the year 2012, inclusive;

  • Upon submitting the income tax return for the fiscal year 2012, however, she was not permitted to attach to this return Annex C – "Category B Income – Organised Accounting Regime", and was instead required to submit Annex B – "Category B Income – Simplified Regime/Isolated Act";

  • Upon requesting clarification on the reason for this requirement, on 21-05-2013, this clarification was communicated to her by means of an office memorandum from the Personal Income Tax Service Directorate of the AT – Tax and Customs Authority (office memorandum without number and without date) (Document no. 3 attached by the Claimants);

  • The aforementioned office memorandum communicated to Respondent B that in the year 2012 she was classified in the simplified regime of the PIT for the following reasons:

  • Having obtained, in the year 2010, gross Category B income exceeding 150,000 Euros, she was, in the following year, automatically classified in the organised accounting regime by legal obligation (and no longer by election);

  • Thus, being classified in 2011 in the organised accounting regime by legal obligation and having obtained in that same year gross Category B income below 150,000 euros, in the year 2012 she automatically transitioned to the simplified regime, in accordance with paragraph 2 of article 28 of the ITC, by not having exercised, by 31 March of that same year, the election for the organised accounting regime.

  • Disagreeing with the content of the clarification, the Claimants chose, initially, to submit the tax return with Annex C - "Category B Income – Organised Accounting Regime";

  • Subsequently, they submitted a replacement declaration in which Annex C - "Category B Income – Organised Accounting Regime" was replaced by Annex B – "Category B Income – Simplified Regime/Isolated Act";

  • From this replacement declaration resulted the assessment now being contested.

  1. The Claimants contend that the PIT assessment relating to the fiscal year 2012, made on the basis of the replacement declaration submitted by them, is illegal, arguing, in summary:

  • There is no legal basis for the interpretation – and consequent action – made by the Tax Authority regarding article 28 of the ITC, according to which Respondent B, by having obtained in 2010 gross Category B income exceeding 150,000 euros, would be automatically classified in the organised accounting regime in that same year, no longer by election but by legal obligation;

  • The interpretation made by the Tax Authority of the aforementioned provision is contra legem and unconstitutional, due to violation of the constitutional principle of taxation based on actual income, enshrined in paragraph 2 of article 104 of the Portuguese Constitution (PC);

  • The simplified taxation regime is a non-mandatory regime, valid only for those who have not elected the organised accounting regime;

  • The election made by the taxpayer in accordance with paragraph 3 of article 28 of the ITC is valid for three years, extendable for equal periods, such that only in the event the taxpayer wishes to change its regime, there falls upon the taxpayer the burden of communicating this intention through a declaration of changes;

  • The Personal Income Tax Service Directorate itself issued doctrine that contradicts the interpretation now being defended, when, in Circular no. 5/2007, of 13 March (which sought to clarify a question of temporal application of a legislative amendment that occurred in that same year) of that Service, it stated that "taxpayers (…) must exercise (…) the election referred to in paragraph 3 of article 28 of the Income Tax Code, by the end of March 2007, to remain in this regime during the three-year period 2007-2009";

  • The position maintained by the Claimants is corroborated by the jurisprudence of superior administrative courts relating to the wording of paragraph 5 of article 28 of the ITC that was in force until 31-12-2006.

  1. In its response to the request for determination presented by the Claimants, the Respondent AT - Tax and Customs Authority seeks its dismissal from the proceedings, raising the exceptions of the Tribunal's lack of competence ratione materiae and ratione hierarchiae and of lis pendens; and seeks, subsidiarily, the rejection of the request, arguing, in summary, as follows:

A) Exception of lack of competence of the Tribunal ratione materiae and ratione hierarchiae

  • The request presented by the Claimants amounts to a request for an arbitral decision determining that Respondent B was classified in the organised accounting regime (in the year 2012) and that the model 3 PIT declaration for 2012, submitted prior to the replacement declaration, was correct and timely submitted, and should therefore receive the corresponding tax treatment;

  • The act in question in the dispute – the act of the Tax Authority that classifies Respondent B in the simplified regime of the PIT – cannot be qualified as an act of determination of the taxable matter that gives rise to the assessment of the tax for the purposes of subsection b) of paragraph 1 of article 2 of the LRTA;

  • In this same sense a decision was already made in the context of tax arbitration in case no. 118/2012-T;

  • There is, therefore, a request to challenge an act of the Tax Authority that is not among the acts provided for in subsections a) and b) of paragraph 1 of article 2 of the LRTA, and which, consequently, does not fall within the competence of this Arbitral Tribunal.

B) Exception of lis pendens

  • The Claimants filed in the Administrative and Tax Court of Porto two special administrative actions that are proceeding under case numbers …1BEPRT;

  • From the comparison between the request for determination formulated and the special administrative actions mentioned, it is evident that all aim at the annulment of administrative acts relating to the classification provided for in article 28, paragraph 2 of the ITC, with the necessary consequences for the model 3 PIT declaration relating to the year 2012;

  • Thus, there exists identity of the requests formulated in both special administrative actions and in the present request for determination made by the Claimants;

  • In both actions brought, as well as in the present request for determination, the parties, the request, and the cause of action are identical, with which the requirements of lis pendens, in accordance with article 580 of the Code of Civil Procedure, are satisfied;

C) Contesting the grounds of the request

  • In the year 2010, Respondent B was classified, by election, in the organised accounting regime;

  • In the year 2011, she was classified in the same organised accounting regime by legal obligation, by virtue of the fact that in the prior year her gross Category B income had exceeded the limit of 150,000 euros provided for in paragraph 2 of article 28 of the ITC;

  • By virtue of having been placed in the organised accounting regime by legal obligation, having ceased to be in it by election, the fact that, in the year 2011, her gross income fell below the aforementioned limit automatically determined, by application of paragraph 2 of article 28 of the ITC, the transition of Respondent B to the simplified regime as of the following year, 2012;

  • This automatic transition to the simplified regime as of the year 2012 would not have occurred only if, in accordance with paragraphs 3 and 4 of article 28 of the ITC, Respondent B had again declared the election for the organised accounting regime by 31 March 2012;

  • Not having declared this election, Respondent B was classified in the simplified regime in the year 2012;

  • In determining Respondent B's classification, in the year 2012, in the simplified regime, the Tax Authority was guided by full compliance with the applicable legal norms;

  • As regards the request directed to the Tribunal for recognition of the right to compensation for providing unwarranted security, its lack of merit is manifest, given that there cannot exist any decision of the Tribunal regarding an eventual future, uncertain, conditional, and unknown fact, whose factual elements are not, at present, even foreseeable.

II – QUESTIONS TO BE DECIDED

  1. The following are the questions to be decided by the Tribunal:

  • Competence of the Tribunal ratione materiae and ratione hierarchiae to decide the present request for determination, in light of the content of the request for determination presented;

  • Existence in the concrete case of a situation of lis pendens that prevents the Tribunal from considering the request, given the pending status of two special administrative actions brought by the Claimants and proceeding in the Administrative and Tax Court of Porto;

  • Legality of the PIT assessment act identified in the case file with no. …, relating to Category B income of Respondent B for the year 2012, which implies determining whether the classification of Respondent B, in that same year, in the simplified regime of the PIT is legal or illegal.

III - FACTUAL FINDINGS DEEMED RELEVANT

  • Respondent B, a taxpayer with Category B income, exercised, in 2007, in accordance with paragraph 3 of article 28 of the Income Tax Code (ITC), the election for classification in the taxation regime based on accounting, having remained in that regime during the three-year period 2007-2009;

  • In the year 2010 the election for the taxation regime based on accounting was automatically renewed;

  • In the year 2010, the gross Category B income obtained by Respondent B exceeded the limit of 150,000 euros provided for in paragraph 2 of article 28 of the ITC (as worded at that date);

  • In the year 2011, the gross Category B income obtained by Respondent B was below the limit of 150,000 euros;

  • Upon submitting the income tax return for the fiscal year 2012, by electronic means, the computer system did not make available to her Annex C – "Category B Income – Organised Accounting Regime". The computer system only made available to her Annex B – "Category B Income – Simplified Regime/Isolated Act";

  • On 21-05-2013, Respondent B requested clarification from the Tax Authority on the reason for the imposition of a declaration according to the simplified regime;

  • The Personal Income Tax Service Directorate of the Tax Authority provided the requested clarification by means of an office memorandum (without number and without date) (Document no. 3 attached by the Claimants);

  • The aforementioned office memorandum communicated to Respondent B that in the year 2012 she was classified in the simplified regime of the PIT for the following reasons:

  • Having obtained, in the year 2010, gross Category B income exceeding 150,000 Euros, she was automatically classified in the organised accounting regime by legal obligation (ceasing to be in that regime by election);

  • Being classified in 2011 in the organised accounting regime by legal obligation and having obtained in that same year gross Category B income below 150,000 euros, this fact caused her, in the year 2012, to automatically transition to the simplified regime, in accordance with paragraph 2 of article 28 of the ITC, by not having exercised, by 31 March of that same year, the election for the organised accounting regime.

  • Disagreeing with the content of the clarification, the Claimants chose, initially, to submit the tax return with Annex C - "Category B Income – Organised Accounting Regime";

  • Subsequently, and in response to the Tax Authority having communicated to them the existence of an error in the declaration, consisting of the incompatibility of the Annex C submitted with the election in the registry, they submitted a replacement declaration in which Annex C - "Category B Income – Organised Accounting Regime" was replaced by Annex B – "Category B Income – Simplified Regime/Isolated Act";

  • From this replacement declaration, made in accordance with the simplified taxation regime for Category B income of the PIT, resulted the assessment now being contested.

  • The Claimants filed, with the Administrative and Tax Court of Porto, two special administrative actions:

  • One, proceeding under case number ….3BEPRT, in which the Claimants/Plaintiffs request the annulment of the office memorandum issued by the Honourable Director of the Personal Income Tax Service, dated 11.06.2013, "by which an error is detected in the model 3 PIT declaration for the year 2012, relating to an incompatibility between the annex submitted and the election in the registry";

  • Another, proceeding under case number….1BEPRT, in which the Claimants/Plaintiffs request the annulment of the office memorandum issued by the Honourable Director of the Personal Income Tax Service, dated 11.06.2013, by which that body "confirms the official alteration of the election of income taxation in the registry".

IV – REASONING

A) Regarding the exception of lack of competence of the Tribunal

  1. Among the issues of an exceptional nature susceptible, if upheld, of preventing the tribunal from deciding on the merits of the case and of resulting in the dismissal of the proceedings, the issue of the tribunal's lack of competence logically precedes all others and must therefore be considered first (article 13 of the Code of Procedure in Administrative Courts, applicable by virtue of article 29, paragraph 1, subsection c) of the LRTA).

  2. As regards the competence of the Tribunal, the Respondent alleges that, "from a reading of the initial petition and attached documents, it is concluded that the request in question amounts to a request for an arbitral decision determining that Respondent B was classified in the organised accounting regime and that the model 3 PIT declaration for 2012 submitted prior to the replacement declaration was correct and timely submitted, and should therefore receive the corresponding tax treatment".

  3. According to the Respondent's further allegation, the Tribunal would not be competent to consider this request, since the competence of arbitral tribunals, as defined in article 2 of the LRTA, would not include the consideration of the legality of the decision of the Tax Authority that maintained the legal classification of the taxpayer respondent, within the scope of a taxation regime.

  4. With due respect, we do not believe that the Respondent is correct on this point. The following are the words used in the request for determination: "J… and M… (…) hereby present a request for an arbitral determination, regarding the assessment of Personal Income Tax issued under no. …, relating to the fiscal year 2012, from which results a total amount payable of 65,870.98 euros and whose deadline for voluntary payment fell on 4 September 2013 (…), which they do on the terms and with the following grounds of fact and law" (page 1 of the initial petition).

  5. Further on, the Claimants state that "the replacement declaration submitted by the Claimants is illegal, and should therefore be purged from the legal order, maintaining, accordingly, the first income declaration submitted (par. 80), from which, consequently, it is concluded that the PIT assessment now in question is illegal, and should be annulled with all legal consequences" (par. 81).

  6. Finally, in the final formulation of the request, Respondent B requests that the Tribunal declare "the illegality of the assessment in question, relating to the fiscal year 2012 (…)".

  7. In light of the wording of the request – and it is on the basis of the request that the Tribunal's competence must be assessed – there can be no doubt that the Claimants are asking the Tribunal to consider the legality of a clearly identified assessment.

  8. The competence of arbitral tribunals in tax matters is defined in article 2, paragraph 1 of the LRTA, which must be read together with articles 2 and 3 of Order no. 112-A/2011, of 22 March ("binding order").

  9. From these provisions it follows that the competence of tax arbitral tribunals encompasses the consideration of the legality, among other acts, of assessment acts for taxes whose administration falls to the AT - Tax and Customs Authority, in accordance with article 2 of the LRTA.

  10. In tax litigation, the principle of unitary challenge applies, established in article 54 of the Code of Tax Procedure and Process (applicable to the present arbitral proceedings by virtue of subsection a) of paragraph 1 of article 29 of the LRTA), according to which "except when they are immediately harmful to the taxpayer's rights or there is express provision to the contrary, interlocutory acts of the procedure are not susceptible to contentious challenge, without prejudice to the fact that in challenging the final decision any illegality previously committed may be invoked".

  11. This legal provision determines not only which are the interlocutory acts of the tax procedure that may be challenged autonomously, but also establishes at the same time the rule that, in challenging the final decision of the procedure, the illegality of any interlocutory act may be invoked (a principle which has exceptions, as will be seen).

  12. In the case in question, the Claimants challenge the assessment act, which was based on, among many other assumptions, the classification of Respondent B in the simplified regime of the PIT. And they do so by attacking precisely the legality of this classification act. The petition of the Claimants is therefore in accordance with the principle of unitary challenge of the tax act, provided for in article 54 of the CTPP and applicable to the present proceedings by virtue of subsection a) of paragraph 1 of article 29 of the LRTA.

  13. Also, contrary to what the Respondent alleges, and still with due respect, the question of competence raised by it in the present proceedings does not have analogy with that decided in arbitral case no. 118/2012-T, of 16.5.2013. In the latter, the Claimants asked the Tribunal, expressly, to consider the legality of an act of determination of taxable matter, when in fact the Tax Authority had not performed any act determining the taxable matter of any tax of which the Claimants were taxpayers. Moreover, there was also, at the date of the filing of the request for arbitral determination, no assessment act for a tax that could be challenged, in connection with the classification of the Claimants in the simplified regime of the PIT. A quite different situation is that of the present proceedings, in which there exists a PIT assessment act that is based on the classification of the taxpayers in the simplified regime of that tax.

  14. It is true that the act that determines the classification of the taxpayer in the simplified regime, being an interlocutory act that does not culminate any procedure, is an act that is immediately harmful (see the judgment of the Higher Administrative Court of 23.06.2010, case no. 1032/09), and for this reason may be challenged autonomously (in this sense, among many others, the judgments of the Higher Administrative Court of 23.10.2013, case no. 1361/13; and of 06.02.2013, case 989/12).

  15. However, one must not confuse the regime of challenge of detachable acts and that of immediately harmful acts (see, for example, the judgment of the Higher Administrative Court of 23.10.2013, case no. 1361/13).

  16. For while detachable acts are interlocutory acts whose autonomous challengeability is expressly provided for in a legal norm, and failure to challenge them timely precludes the right to attack their legality at any other time thereafter (judgment of the Higher Administrative Court of 29.06.05, case no. 234/05), harmful acts are acts whose autonomous challengeability is not expressly provided for in law, which results in the fact that failure to autonomously challenge them does not preclude the right to attack their legality in the challenge of the act that brings the procedure to an end.

  17. The regime for challenging immediately harmful interlocutory acts, distinct from that of detachable acts, is justified by the fact that the autonomous challengeability of these acts constitutes a constitutionally expressed guarantee (enshrined in article 268, paragraph 4 of the PC), with the consequence that such challengeability must be interpreted in the sense of an expansion of the means of defense of the administered and not as a limitation of the possibility of defense, as occurs with detachable acts (in this sense, Jorge Lopes de Sousa, Code of Tax Procedure and Process annotated and commented, Vol. I, 6th ed., Lisbon, 2011, pp. 468-470).

  18. Now, the act of classification of Respondent B in the simplified regime of taxation is autonomously challengeable by being harmful, not by being a detachable act. Therefore, its illegality may be invoked in the challenge of the final act of the assessment procedure, of which it is an interlocutory act.

  19. For the reasons set out, this arbitral panel considers it not to uphold the exception of lack of competence of the Tribunal ratione materiae alleged by the Respondent.

  20. As regards the lack of competence ratione hierarchiae, the Respondent does not set out, nor does the Tribunal discern any argument that could support such lack of competence, so that this exception is likewise considered not to be upheld.

B) Regarding the exception of lis pendens

  1. The exception of lis pendens presupposes the repetition of a cause of action (article 580, paragraph 1 of the Code of Civil Procedure (CCP)), which is verified when the parties, the request, and the cause of action are identical in both actions.

  2. The objective of the exception of lis pendens is to prevent the tribunal from being placed in the alternative of contradicting or reproducing a prior decision (article 580, paragraph 1 of the CCP).

  3. In the case at hand, there is manifest identity of parties between the special administrative actions brought by the Claimants in the Administrative and Tax Court of Porto and the current request for determination.

  4. There is likewise clear identity regarding the cause of action, which exists when the claim made in both actions proceeds from the same legal fact. The common legal fact is, in all three cases in question, the exercise of the election for the organised accounting regime that Respondent B made, and from which she intends to derive the consequence of the illegality of the official alteration of this taxation regime.

  5. As regards identity of request, this exists when in both causes of action one seeks to obtain the same legal effect (article 581, paragraph 3 of the CCP).

  6. On this point, it must be concluded that there is no identity of requests.

  7. In one of the two special administrative actions proceeding in the Administrative and Tax Court of Porto, the annulment of the office memorandum of the Tax Authority that "detects an error in the model 3 PIT declaration for the year 2012" is sought, while in the second the request consists of the annulment of the office memorandum of the Tax Authority that "confirms the official alteration of the election of income taxation in the registry".

  8. Now, in the present request for determination the fundamental objective of the Claimants is the declaration of the illegality of the PIT assessment act relating to the year 2012. In none of the earlier actions is the annulment or declaration of nullity of the same assessment act requested. The requests are, therefore, distinct.

  9. For this reason, the Tribunal considers the exception of lis pendens not to be upheld.

C) On the legality of the act of classification of Respondent B in the simplified regime of the PIT in the year 2012 and, consequently, of the PIT assessment of that same year

  1. The simplified taxation regime provided for in article 28 of the ITC constitutes a non-mandatory regime, which depends on the election of the taxpayer (see, for example, the judgment of the Higher Administrative Court of 17.03.2010, case no. 56/10).

  2. This means that the default regime as regards taxation of Category B income of the PIT is the regime of taxation based on accounting. Indeed, even filling all the requirements to be taxed under the simplified regime, the taxpayer is only encompassed by it if he makes that election. The reverse is not true. If the taxpayer exceeds the limits established for the simplified regime, he cannot, even if he wishes to, be taxed under the simplified regime.

  3. Although the regime of taxation based on accounting is the default regime and the simplified regime is always an optional regime, the legislator requires that the taxpayer expressly manifest his election for the regime of taxation based on accounting, rather than determining that he automatically remains, in the absence of an express manifestation of election, in the regime of taxation based on accounting.

  4. When the taxpayer makes an election for the organised accounting regime, such election means that, even if the taxpayer's gross income falls below the limits of the simplified regime, he will continue to be classified in the regime of taxation based on accounting.

  5. Respondent B made the election for the organised accounting regime in 2007, maintaining this election valid during the three-year period 2007-2009.

  6. At the end of this period, the election made was automatically renewed for an equal period, and should remain valid during the three-year period 2010-2012.

  7. In the years 2011 and 2012, Respondent B obtained gross Category B income below 150,000 euros. The situation of the taxpayer in the years 2011 and 2012, with the obtaining of gross income below 150,000 euros, is exactly that in which the election for the organised accounting regime is designed to produce its effects.

  8. Now, if the election that the taxpayer makes for the regime of taxation based on accounting is designed precisely to allow him to remain in this regime even when his gross income falls below the limits of the simplified regime, and if this election is valid for a period of three years, it is not clear how the taxpayer can transition to the simplified regime during the period of validity of this election. The election of the taxpayer for the regime of taxation based on accounting shall cease only if the taxpayer himself manifests the intention to alter this regime. And if, during the period of validity of the election, the taxpayer remains in the regime of taxation based on accounting, it is not clear what logical motivation would lead the taxpayer to renew his election.

  9. But it is the law itself that says, expressly (paragraph 4 of article 28 of the ITC), that the election of the taxpayer for the regime of taxation of organised accounting must be made only in two circumstances:

a) In the declaration of commencement of activity;

b) By the end of March of the year in which they wish to change the method of income determination.

  1. If the hypothesis of subsection a) of paragraph 4 of article 28 does not apply because there is no situation of commencement of activity, the hypothesis of subsection b) does not apply either because the taxpayer, not being in the simplified regime, cannot wish to change from it to the regime of taxation based on accounting.

  2. The Tax Authority's interpretation amounts to admitting the existence of a rule, which is not expressed anywhere in the law, according to which, if the taxpayer, by his express election, is in the organised accounting regime, and if, in the course of the three-year period of validity that the law provides for this election, the taxpayer obtains, in any of the fiscal years comprised in this period, a volume of sales exceeding the limit of 150,000 euros provided for in paragraph 2 of article 28 of the ITC (as worded prior to the amendment made by Law no. 83-C/2013 of 31 December), his election for the organised accounting regime lapses, and he is placed in the same regime no longer by election, but by "legal obligation".

  3. This rule, as stated, is not found in the law. And insofar as this rule creates a burden on the taxpayer, not being found in the law, it cannot be applied by the Tax Administration, under penalty of violation of the principle of legality (article 8, paragraphs 1 and 2, subsection c) of the General Tax Law).

  4. In addition to not being provided for in the law, the hypothetical rule that the Tax Authority intends to apply is contrary to the literal and most direct sense of the rule, which is indeed expressed, according to which the election made by the taxpayer is valid for a period of 3 years.

  5. The jurisprudence relating to the legislative situation prior to the establishment, in paragraph 5 of article 28 of the ITC, of the three-year period for the validity of the election for the regime of taxation based on accounting confirms this understanding. The judgment of the Higher Administrative Court of 26.9.12, case no. 530/12, referring to the norms in force prior to 2007[1], states: "should the taxpayer have elected (…) the organised accounting regime, there would be no way to apply the simplified regime to him, since the provision did not provide for the lapsing of this election nor established any minimum period of stay in the general regime".

  6. Now, the law continues not to provide for the lapsing of the election for the organised accounting regime.

  7. In the same judgment it is further stated: "And only in the case that [the taxpayer] be subject to the simplified regime (due to lack of election for the general regime in the declaration of commencement of activity and automatic inclusion in the simplified regime in light of the criteria provided for in paragraph 2 [of article 28 of the ITC]) is it comprehensible that the law would require him to deliver, should he wish to be taxed under the general regime in a given year, the declaration of changes by the end of March of that year. If he was already included in the general regime, by election made in the declaration of commencement of activity in accordance with subsection a) of paragraph 4, he did not have to renew this election annually, in accordance with subsection b) of paragraph 4".

  8. While it is true that amendments to the provisions whose application is at issue have occurred in the meantime, all that is stated in the referenced judgment and that is relevant to the case at hand remains applicable. Moreover, all the amendments that have occurred since have been in the direction of clarifying the rule according to which the election of the taxpayer for organised accounting remains valid – and therefore does not lapse – during the three-year period.

  9. The interpretation made by the Respondent of paragraphs 1, 2, and 4 of article 28 of the ITC therefore lacks legal support. This interpretation, imposing on the taxpayer a burden, relating to an accessory tax obligation, that the law does not provide for, and which is even contrary to the literal and most direct sense of an expressed rule, is an interpretation that violates the principle of tax legality, enshrined in article 103, paragraphs 2 and 3 of the PC and in article 8, paragraph 1 and paragraph 2 of the General Tax Law.

V. DECISION

For the reasons set out, the present Tribunal decides:

  1. To declare illegal the act of assessment of PIT, in the part relating to Category B income obtained by Respondent B in the year 2012, due to error in the legal assumptions on which the same assessment was based, by considering Respondent B to be classified, in that year, in the simplified regime of taxation of the PIT, when she should have been considered to be classified in the regime of taxation based on accounting (both provided for in article 28 of the Income Tax Code), in accordance with the election made by her.

  2. To declare the Tax Authority obliged, in accordance with subsection b) of paragraph 1 of article 24 of the LRTA, to restore the situation that would have existed if the assessment act declared illegal had not been performed, adopting the acts and operations necessary for that purpose.

Value of the case: The value of the case is set at 65,807.98 Euros.

Costs: In accordance with article 22, paragraph 4, of the LRTA, the amount of costs is set at 2,448.00 € Euros, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Respondent.

This arbitral decision shall be registered and notice thereof given to the parties.

Lisbon, Centre for Administrative Arbitration, 28 March 2014.

The Arbitral President

(Jorge Lino Alves de Sousa)

The Arbitral Panelist

(Marcolino Pisão Pedreiro)

The Arbitral Panelist and Rapporteur

(Nina Aguiar)

[1] It was Law no. 53-A/2006, of 29 December, which added to article 28 of the ITC paragraph 5, with the following wording: "5 - The minimum period of stay in any of the regimes referred to in paragraph 1 is three years, extendable for equal periods, except if the taxpayer communicates, in accordance with subsection b) of the preceding paragraph, the alteration of the regime to which he is subject".

Frequently Asked Questions

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What is the accounting-based taxation regime (regime de tributação com base na contabilidade) under Article 28(3) of the Portuguese IRS Code?
The accounting-based taxation regime under Article 28(3) of the Portuguese IRS Code is an optional taxation method for Category B income earners (self-employed professionals and business owners) where tax liability is determined based on organized accounting records rather than the simplified regime's presumptive coefficients. Taxpayers may elect this regime, which becomes valid for three years and is automatically renewable for equal periods under Article 28(5). This regime requires maintaining proper accounting books and records, but allows for deduction of actual business expenses rather than applying standard coefficients to gross income.
Can liberal professionals in Portugal opt for accounting-based taxation instead of the simplified regime for IRS purposes?
Yes, liberal professionals in Portugal can opt for accounting-based taxation instead of the simplified regime for IRS purposes under Article 28(3) of the IRS Code. The election must be exercised through a declaration of changes filed with the tax authority. Once made, the election is valid for three years and automatically renewable unless the taxpayer opts to change regimes. The accounting-based regime may be advantageous when actual deductible expenses exceed the amounts that would be presumed under the simplified regime's coefficients. However, taxpayers earning gross Category B income exceeding €150,000 are mandatorily subject to the accounting regime by legal obligation.
What are the grounds for challenging an IRS tax assessment through CAAD tax arbitration?
Grounds for challenging an IRS tax assessment through CAAD tax arbitration include illegality of the assessment due to breaches of tax law or constitutional provisions, as provided in Article 2(1)(a) of Decree-Law 10/2011 (Legal Regime for Tax Arbitration) in conjunction with Articles 99(a) and 102(1)(d) of the Tax Procedure Code (CPPT). Taxpayers may challenge the substantive legality of tax assessments, including disputes over applicable taxation regimes, calculation methods, or interpretation of tax code provisions. Challenges may allege violations of legal principles, including constitutional rights such as taxation based on actual income. Taxpayers may also seek compensation for unwarranted guarantees under Article 171 CPPT and Article 53 LGT when assessments are declared illegal.
Does the CAAD tax arbitration tribunal have jurisdiction over disputes regarding the choice of IRS taxation regime?
The CAAD tax arbitration tribunal generally has jurisdiction over disputes regarding the choice of IRS taxation regime under Article 2(1)(a) of the Legal Regime for Tax Arbitration, which grants jurisdiction over legality of tax acts including assessments. However, in Case 266/2013-T, the Tax Authority raised preliminary exceptions challenging the tribunal's competence ratione materiae and ratione hierarchiae. The determination of whether the tribunal has jurisdiction depends on whether the dispute concerns a matter within the scope of administrative arbitration for tax matters and whether it falls within the monetary and hierarchical limits established by law. Disputes over application and interpretation of taxation regime provisions under Article 28 of the IRS Code typically fall within CAAD's jurisdiction as they concern the legality of resulting tax assessments.
What indemnification rights exist under Article 53 LGT when a tax assessment is declared illegal in Portugal?
Under Article 53 of the General Tax Law (LGT), when a tax assessment is declared illegal in Portugal, taxpayers have the right to indemnification for damages resulting from the illegal act, including compensation for guarantees provided to suspend enforcement proceedings. Article 171 of the Tax Procedure Code (CPPT) specifically addresses compensation when guarantees are deemed unwarranted following successful challenge of the underlying tax debt. Indemnification covers costs associated with providing bank guarantees, insurance bonds, or other security instruments, including fees, commissions, and interest charges. The compensation aims to restore the taxpayer to the position they would have occupied had the illegal assessment not occurred. This right is applicable in tax arbitration proceedings under Article 13(5) of the Legal Regime for Tax Arbitration.