Process: 267/2017-T

Date: December 12, 2017

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD Process 267/2017-T addressed a critical procedural issue in Portuguese tax law: whether conducting two consecutive external tax inspections for the same tax period violates Article 13 of the RCPIT (Regime Complementar do Procedimento de Inspeção Tributária) and Article 63(4) of the LGT (Lei Geral Tributária). The case involved A... S.A., challenging a Corporate Income Tax (IRC) assessment of €159,512.54 for fiscal year 2012. The taxpayer underwent an initial internal inspection in July 2015, which concluded that external action was necessary. Subsequently, in June 2016, the Tax Authority initiated a full external inspection covering the same period and issues. The core legal question centered on whether this sequential approach constituted an illegal double external inspection. Article 13 of RCPIT establishes strict limitations on repeating external inspections to protect taxpayer rights and ensure procedural fairness. Article 63(4) of LGT reinforces this prohibition by restricting the Tax Authority's power to conduct repeated inspections on the same taxpayer for identical tax periods and matters. The substantive tax issue involved the deductibility of financial expenses (€3,795,540 in interest) arising from a reverse merger transaction where loans were consolidated. The Tax Authority argued that interest attributable to acquisition financing (Loan 2 - €69,884,000) was not deductible under Article 23 of the IRC Code as not being indispensable expenses. The tribunal's analysis would determine whether the procedural violation of double inspection warranted annulment of the assessment, regardless of the substantive merits. This decision has significant implications for taxpayers facing multiple inspection procedures, establishing important precedents for CAAD arbitration remedies and the boundaries of Tax Authority inspection powers under Portuguese tax law.

Full Decision

CAAD TAX ARBITRATION DECISION - ENGLISH TRANSLATION

The arbiters José Baeta de Queiroz (arbitrer-president), Tomás Cantista Tavares and Américo Brás Carlos (arbiters vogais), designated respectively by CAAD (in the absence of agreement of the arbiters appointed by the parties), by the Claimant and by the Respondent to form the Arbitral Tribunal, hereby agree as follows:

1. Report

A…, S.A., taxpayer no. …, with registered office at …, no. … –…– Floor…, …-… Carnaxide (hereinafter A… or Claimant), filed a request for constitution of the collective arbitral tribunal, pursuant to the combined provisions of articles 2, no. 1, lit. a), and 6, no. 2, lit. b) of Decree-Law no. 10/2011, of 20 January (Legal Regime of Tax Arbitration, hereinafter LRTA), in which the Tax and Customs Authority (hereinafter TCA) is the Respondent, with a view to the declaration of illegality and consequent annulment of the assessment of Corporate Income Tax and compensatory interest no. 2016…, relating to the fiscal year 2012, which resulted in a total amount of Corporate Income Tax and compensatory interest of €159,512.54.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and followed its normal procedure, in particular with notification to the TCA. All arbiters communicated their acceptance within the applicable deadline. The parties expressed no intent to refuse the designation of the arbiters.

The collective arbitral tribunal was constituted on 26/6/2017.

The TCA responded, contending that the request should be judged without merit.

By Order, with the agreement of the parties, the meeting required by article 18 of the LRTA was not held; written pleadings were submitted.

The arbitral tribunal was regularly constituted and is materially competent, as provided in articles 2, no. 1, lit. a) and 4, both of the LRTA.

The parties possess legal personality and capacity, are legitimately constituted and are represented (articles 4 and 10, no. 2, of the same statute and articles 1 to 3 of Ordinance no. 112-A/2011, of 22 March).

The proceedings contain no nullities and there is no obstacle to the appraisal of the merits of the case.

2. Factual Matter

2.1. Proven Facts

The following facts relevant to the decision are considered proven:

RELATING TO THE REVERSE MERGER

a) The claimant engages in the activity of operation, administration and management of commercial spaces.

b) In 2000, the entities B…, S.A. (held by C…) and D…, S.A. (held by E…), each held 50% of the Claimant:

c) In 2000, entities B… and D… (representing A…) entered into a construction contract for what would become the …, located in the Porto metropolitan area, in … ("…") – valued at €53,360,787.00.

d) Entities B… and D… provided the Claimant with the necessary funds to carry out the construction: they granted it financing (capital contributions) in the total amount of €53,360,787, divided equally between each financier (Loan 1).

e) Subsequently, the F… group (listed on the French Stock Exchange) acquired 100% of the capital and receivables over A… – and at the beginning of 2009, the corporate structure of the F… group's investments in Portugal was as follows:

f) In 2009, the F… Group proceeded with a corporate restructuring to simplify the corporate structure in Portugal.

g) On 29 June 2009, I… sold the shareholdings it held in the Claimant (100%) to G… (entity held by H…, SGPS, SA – "H…") at market price, in the total amount of €69,884,000.00.

h) H… granted G… financing in the amount corresponding to the aforementioned price, in the total amount of €69,884,000.00 ("Loan 2").

i) Furthermore, I… transferred to H… SGPS, at nominal value, the receivables it held over the Claimant (for construction of the…), amounting to €35,817,057.30 (Loan 1).

j) On 18 November 2009, the Claimant incorporated, through reverse merger with its sole shareholder (G…), thereby becoming directly held (100%) by H…, in the following corporate structure:

k) As a consequence of the merger, the financing granted by H… to G… for the acquisition of the Claimant's shares, in the amount of €69,884,000.00, was transferred to the claimant, by operation of law of the merger.

l) Consequently, H… consolidated the aforementioned loans in the total amount of €104,937,330.91 (€35,817,057.30 + €69,884,000.00)

m) The Claimant has been discharging this debt over the years, as appears from the following schedule:

n) In 2012, the Claimant incurred financial expenses (interest) with respect to this total (consolidated) loan, in the amount of €3,795,540, which it qualified and treated, in its self-assessment of Corporate Income Tax, as a cost fully deductible for tax purposes.

o) The TCA contends, conversely, (as appears from the grounds of the assessment in question) that the portion of interest corresponding to the loan for which G… was the debtor (and which became the debtor of the Claimant as a consequence of the merger) is not deductible as such expenses are not indispensable within the meaning of article 23 of the Corporate Income Tax Code.

RELATING TO THE INSPECTION PROCEDURE

p) On 26/7/2015, the Claimant was notified to present to the TCA – under the principle of cooperation – various elements relating to the financial expenses of 2012: analytical account statements, list of capital holders, statement of capital shares, list of credits obtained and granted, including the respective contracts and account statements (doc. no. 10 of the PI).

q) In April and May 2016 the TCA requested the Claimant for further clarifications, in a sequence of nine e-mails exchanged (question and answer type), essentially to clarify situations of asset accounting and detailed composition of accounting accounts.

r) The Claimant provided to the TCA all the information and documentation requested - described in the proven facts p) and f).

s) As a consequence of the aforementioned inspection acts, the claimant was notified, by Official Notice no. … of 31 May 2016, that "internal scope inspection action carried out by this Service, under the Service Order referenced above, did not result in adverse tax acts, given that, based on the inspection procedure carried out internally, it was not possible to analyze its tax situation, proposing external action" – our emphasis.

t) On 27/6/2016, the Claimant was notified of service order no. OI2016…, relating to an external inspection procedure concerning Corporate Income Tax for 2012.

u) In this inspection procedure, the inspectors went to the Claimant's facilities (to gather information and clarifications) and the Claimant delivered the requested documents, as well as, although under reservation, a proposed allocation of the interest incurred with the Consolidated Loan.

v) In this external inspection process, the TCA did not come into contact with new facts, which it was not already aware of or could have been aware of in the first inspection.

w) On 03/11/2016, the Claimant was notified of the draft tax inspection report, where the TCA proposed the following corrections to the Claimant's Corporate Income Tax taxable matter (subsequently made final), due to non-acceptance of the portion of financial expenses allocated to Loan 2.

Fiscal Year Taxable Result (Taxable Income / Tax Loss) Proposed Correction Corrected Taxable Matter
2012 (€821,826.91) €2,543,011.80 €1,721,184.89

x) As a consequence of this correction to the taxable matter, the Claimant was notified of the Contested Assessment (additional assessment of Corporate Income Tax and compensatory interest no. 2016…, relating to fiscal year 2012, which resulted in a total amount payable of €159,512.54) – the impugned assessment.

y) The claimant suspended the corresponding tax enforcement proceeding no. …2010…, with the provision of bank guarantee no. …, issued on 22 March 2017, in the amount of €202,157.79, and provision and payment of deposit in the amount of €238.21

2.2. Unproven Facts

There are no facts with relevance to the appraisal of the merits of the case that have not been proven.

2.3. Grounds for the Establishment of the Factual Matter

The proven facts are based on documents presented by the parties (which are, essentially, documents issued by the Tax Authority, of the merger and financing), on the consensus of the parties (also regarding the documents and values and dates of payments) and on official information attached to the proceedings.

3. Legal Matter

3.1. Issues to be Decided

According to the Claimant, the impugned assessment suffers from the following illegalities:

a) Of the inspection procedure (which entails the illegality of the assessment – article 54 of the CTTP), because: (i) two external inspection procedures occurred, in violation of article 63, no. 4, of the General Tax Law; or (ii) if it were considered that there was only one inspection procedure, the respective legal maximum duration would have been exceeded (article 36 of the RCPIT);

b) Violation of law, by disregarding the deductibility of part of the financial expenses (interest) incurred and deducted by the Claimant in fiscal year 2012, by violation of article 23, no. 1, lit. c) of the Corporate Income Tax Code;

c) Unconstitutionality, by violation of the principle of tax legality (articles 103, no. 2 and 165, no. 1, lit. i), of the CRP), if article 23 of the CITC is interpreted in the manner in which the TCA interprets it;

d) Unconstitutionality and illegality of the assessment, due to lack of grounds and computational error, in violation of no. 3 of article 268 of the CRP and article 77 of the General Tax Law.

The TCA refutes all stated illegalities:

a) It contends that there was a legal internal inspection procedure, then followed by a legal external procedure: therefore, there was no violation of article 63, no. 4, of the General Tax Law, nor were the maximum duration periods of the external inspection exceeded.

b) The interest in question (arising from or following the merger) would not be indispensable for obtaining income or maintaining the productive source, and therefore should not be deductible in tax terms, in the interpretation advocated by it of article 23 of the CITC.

c) The assessment and its respective grounds are duly substantiated and interpret legal provisions that comply with the principle of legality and typicality, whereby there exists no illegality or unconstitutionality.

3.2. Order of Knowledge of the Defects of the Decision

The Claimant invoked, in summary, two distinct blocks of arguments that would lead, in its view, to the annulment of the assessment, with the following precedence: first, it addressed the arguments that relate to the existence of an illegal double external inspection; and, secondly, it developed the rhetoric relating to the illegality and unconstitutionality of article 23 of the CITC (and defect of grounds).

Now, taking into account, on the one hand, the following four arguments:

a) None of the stated illegalities substantially relates to a matter of nullity;

b) Both defects produce the same efficacy in the protection of the injured interests, that is, the merits of each of the arguments [perhaps if we except the invoked lack of grounds] determines the annulment of the impugned assessment, with the impossibility of executing a new substitutive act;

c) The Claimant opened its argument with the matter of double inspection – and only afterwards spoke of the part relating to the interpretation and application of article 23 of the CITC to the interest in question;

d) In the arbitral proceeding there is no pronouncement by the Public Prosecutor.

And considering, on the other hand, what is provided in article 124 of the CTTP (applicable to the arbitral proceeding, ex vi article 29 of the LRTA).

The Tribunal decides to analyze first the matter of the alleged double external inspection (produces effective protection of the interests of the injured party and was deduced first in the claim) and will address itself only to the remaining grounds adduced by the Claimant, in the event of non-merit of that first argument.

The merits of the matter of double external inspection determines an effective protection of the interests of the taxpayer – in the sense that it ends the cause, with the impossibility of repetition of the act by the TCA (just as the merits of the remaining argument based on the interpretation of article 23 of the CITC).

On the other hand, the matter of double inspection was adduced first in the claim filed by the Claimant and relates to defects of procedure, chronologically anterior to those observed in the assessment (and its grounds) based on the imputed erroneous interpretation of article 23 of the CITC.

3.3. The Matter of the So-Called "Double External Inspection"

3.3.1: The Applicable Laws

Article 63, no. 4, of the General Tax Law provides: "The inspection procedure and the duties of cooperation are adequate and proportional to the objectives to be pursued, and there may only be more than one external inspection procedure concerning the same taxpayer or tax-obligated party, tax and taxation period by decision, substantiated based on new facts, of the highest-ranking official of the service, except if the inspection aims only at confirmation of the assumptions of rights that the taxpayer invokes before the tax administration and without prejudice to the determination of the tax situation of the taxpayer by means of inspection or inspections directed at third parties with whom it maintains economic relations."

Article 13 of the RCPIT (in the wording given by Decree-Law no. 36/2016, of 1 July) classifies tax inspection procedures as internal and external, as follows:

"a) Internal, when inspection acts are carried out exclusively in the services of the tax administration through formal analysis and consistency of documents held by it or obtained within the scope of said procedure;

b) External, when inspection acts are carried out, wholly or partially, in facilities or dependencies of the taxpayers or other tax-obligated parties, of third parties with whom they maintain economic relations or in any other location to which the administration has access."

The previous wording of article 13, lit. a) of the RCPIT prescribed that the procedure was: a) Internal, when inspection acts are carried out exclusively in the services of the tax administration through formal analysis and consistency of documents.

In turn, article 34, no. 1, of the RCPIT provides: "When the inspection procedure involves verification of merchandise, the production process, accounting, books of account or other documents related to the activity of the entity being inspected, the inspection acts are carried out in the facilities or dependencies where such elements are or must legally be located."

Finally, article 54 of the CTTP indicates that "except when they are immediately injurious to the rights of the taxpayer or express provision otherwise, interlocutory acts of the procedure are not subject to contentious impugnation, without prejudice to the possibility of invoking in the impugnation of the final decision any illegality previously committed."

3.3.2 The Arguments of the Parties

The claimant contends that the first inspection, although formally qualified by the TCA as internal, was, in reality, external, as the TCA, despite not having gone to the Claimant's facilities or those of third parties, requested from the taxpayer a set of information that the TCA could never possess by itself. Therefore, there were two external inspections, the second being illegal (contaminating the resulting assessment with the same epithet), by violation of article 63, no. 4, of the General Tax Law. Or if it were understood that there was only one inspection by the sum of the periods of the "two", the same is illegal, as it took place for longer than provided for in the law (article 36 of the RCPIT).

The Respondent contends that there was an internal inspection (which did not result in corrective acts) followed by an external inspection (carried out within the legal period) – therefore, there would be no double external inspection. In the view of the Tax Administration, the first inspection was internal, as the TCA did not go to the taxpayer's facilities, nor to those of third parties. It carried out all its inspection work "within doors," with the internal inspection consisting of questions to the taxpayer (letter or e-mail) linked to information and clarifications relating to declarations of taxpayers.

3.3.4. Decision

For the proper decision of the matters at hand, it is important to organize the decision-making process in FIVE points.

First: the legal nature of a procedure regarding its place of execution (external or internal) is not determined by the qualification given by the TCA to the inspection, but by the real nature of the inspection process, considering its concrete characteristics and vicissitudes. The qualification given by the Tax Administration to an inspection has no binding effect. And moreover, if an inspection is not internal, then it is external – and there is no third intermediate category.

Second: in the case at hand, there is no question of application of the law over time in relation to what is provided in article 13, lit. a) of the RCPIT. The first inspection took place between 6/2015 and 27/6/2016; article 13 of the RCPIT was amended by Decree-Law no. 36/2016, of 1 July. Therefore, the new law, which understands that there is an internal inspection by formal analysis and consistency of documents, even if obtained (from the taxpayer or third parties) during said procedure, does not apply to the case at hand, as when this provision came into force the first inspection was already completely finished.

Consequently, the old Law applies to the case at hand (more restrictive), which understands that there is an internal inspection only when inspection acts are carried out exclusively in the services of the tax administration through formal analysis and consistency of documents.

And there can be no retroactive interpretation of the new law – with application to past legal situations already consolidated (passing external inspections already finished to be considered as internal!), by violation of the guarantees and defense rights of taxpayers previously constituted (cf. article 12, no. 3, of the General Tax Law).

Third: it is undeniable that the TCA, in that first inspection, did not physically go to the taxpayer's or a third party's facilities. But it is equally undeniable that the TCA, in the validity of the old law, did not limit itself to organizing the information it had – it requested that the claimant provide it with a set of data, information and documents.

Fourth: the prohibition regarding the existence of two or more external inspections with a similar object (same taxpayer, same acts or operations, same fiscal year, same tax) aims at the protection of the legal security of the taxpayer (and stability of the legal relationship) against the prolongation over time of the obligations of cooperation and factual (having a place for officials, making available time and resources of the taxpayer) and legal instability that an inspection necessarily entails.

The principles are clear: the TCA may inspect (externally) whoever it deems appropriate, for the legal periods (6 months, extendable), with global access to all information of the taxpayer (subject to demanding duties of cooperation). It is required by the principle of legality and is the counterpart of a system that places the declaration and self-assessment on the shoulders of private parties. But, by principle, there may only be one external inspection with the same object – for security of the taxpayer and to press the system, necessarily with limited resources, to broaden those subject to inspection. A second external inspection may occur if new facts come to be known, not identified in the first inspection, usually due to deficient cooperation by the taxpayer or because, in the meantime, information has been obtained from third parties (with economic relations with the taxpayer) regarding the taxpayer's conduct in the inspected period (and operations analyzed).

These are the exceptions that confirm the rule: double external inspection with identity of object is prohibited in general; but it is allowed, exceptionally, based on new facts, obtained by any means (from third parties or from the taxpayer) but that were omitted in the first inspection (usually due to reprehensible acts of non-cooperation and collaboration). In this case, security cannot prevail over justice, as it is surely based on cunning conduct by the taxpayer (of hiding or disguising facts and information), which does not merit legal protection. Now, in the other cases, the law gives prevalence to legal security: if the Tax Administration, in external inspection, had access to all information in full cooperation of the taxpayer and contends that everything is well, it cannot then contradict itself, if it has nothing factually new in its possession (which it did not know before because it was omitted from it and which it would not obtain in its normal duty of investigation).

Fifth: the qualification of inspection as internal or external, in the absence of displacement to the taxpayer or to a third party, must be determined, concretely, by the type of documents obtained by the TCA: if it is a matter of information that is in its possession (or public), by consequence of declarations sent by the taxpayer – and in that case the inspection is internal; or conversely, if it availed itself of more extensive information, requested from the taxpayer or a third party (even if without physically displacing), but which was not originally in its possession or knowledge, by effect of the taxpayer's declarative obligations – and then we are in the presence of a real external inspection, even if it is not so qualified by the TCA. In essence, in this latter case, the TCA obtains information (because requested from the taxpayer by physical or electronic mail) which it could only obtain, according to the law, in external inspection action (with physical displacement).

It remains now to analyze the concrete case at hand in the light of the five ideas stated above.

The TCA, in the first inspection of the Claimant, which lasted about a year, despite qualifying it as internal, requested and asked the taxpayer, by physical and electronic mail, to make available to it the following set of data, information and documents (relating to Corporate Income Tax for 2012 and concerning the merger operation and consequent financial expenses): analytical account statements, list of capital holders, statement of capital shares, list of credits obtained and granted, including the respective contracts and account statements. And later, still within the same inspection, asked the taxpayer (in a series of e-mails, question/answer type) to clarify situations of asset accounting and detailed composition of accounting accounts.

Now, this type of information – contracts, detailed account composition, supporting elements (account statements) – clearly exceed the type of information held by the TCA, inherent in the declarations sent. The Tax Administration could only obtain such data, by displacement to the company's facilities, in the analysis of the taxpayer's accounting and obtaining other elements from the inspected entity – cf. article 34, no. 1, of the RCPIT.

In other words: in the first inspection, the TCA did not limit itself to formal analysis and consistency of documents in its possession – but, by request of the taxpayer, obtained and analyzed other more extensive information, in successive requests, with data it did not possess ab initio.

Thus – and in summary – that first inspection should be qualified as external, especially because the case at hand is governed by the old wording of article 13, lit. a) of the RCPIT in which internal inspection had a more restricted and limited scope. Currently, the inspection continues to be internal, when the TCA obtains these elements within the scope of that procedure. Whereas at that time the law restricted internal inspection to formal analysis and consistency of documents strictly linked to the tax declarations made by the taxpayer themselves.

Consequently, we are in the presence of two external inspection processes with the same object (same taxpayer, same operation, same tax, same facts). In the first, the TCA filed the case; in the second, initiated soon after the end of the first, the TCA corrects the subject's tax matter, resulting in the assessment now contested.

Now, the second external inspection is illegal, by violation of article 63, no. 4, of the General Tax Law. It is not based on new facts, unknown to the TCA during the first inspection process. The A… always actively cooperated with the Tax Administration during the first inspection: it showed and exhibited everything that the Tax Administration requested. On the other hand, it was not demonstrated that the second inspection was based on other new facts, which were not known and evidenced in the first inspection.

Furthermore, it is not possible to engage in any valid reasoning that could save the procedure: the consideration that there could materially be only one single external inspection process, spanning the time of both procedures, encounters the situation of clear exceeding of the inspection period, which would last for more than 12 months, in clear violation of what is provided in articles 36, nos. 3 and 4, of the RCPIT).

It is therefore necessary to annul the assessment in question, by violation of what is provided in article 63, no. 4, of the General Tax Law. The procedure is illegal, as it is based on a second illegal external inspection – and this defect communicates itself to the final act of the assessment, in accordance with article 54 of the CTTP.

3.4. Other Matters of the Proceeding

The decision at hand – illegality of the assessment by reason of its being based on an illegal external inspection, by force of article 63, no. 4, of the General Tax Law – makes unnecessary the Tribunal's pronouncement on the remaining issues (illegality and unconstitutionality of article 23 of the CITC).

The illegality of the tax assessment is accompanied, with equal outcome, in relation to compensatory interest, which by legal requirement, is moreover integrated into the tax debt itself, with which it is jointly assessed (article 35, no. 8, of the General Tax Law). If the assessment is illegal, so too is the assessment of compensatory interest, especially since the TCA neither invoked nor proved any grounds that might justify a different outcome as to interest.

On the other hand, having the claimant provided a bank guarantee to suspend the enforcement proceeding, the same should be declared lapsed, in view of the tenor of this decision, in accordance with article 26, no. 2, of the LRTA and the taxpayer is entitled to be indemnified, in accordance with the law, in the execution of this decision (preferably or alternatively by judicial enforcement), for the costs borne by it, because it is considered that there was an error attributable to the services (article 53 of the General Tax Law) in carrying out an illegal procedure and in assessing (and enforcing) a tax without legal basis (no. 2).

4. Decision

In accordance with the foregoing, the arbiters of this Arbitral Tribunal agree to:

a) Judge the request for declaration of illegality of the impugned assessment of Corporate Income Tax and compensatory interest no. 2016…, relating to fiscal year 2012, which resulted in a total amount of Corporate Income Tax and compensatory interest payable of €159,512.54, to have merit.

b) Annul the assessment of tax and compensatory interest referred to in a).

And in consequence:

c) Grant the claimant the right to indemnification for unwarranted guarantee, to be settled spontaneously by the services of the Tax and Customs Authority or, in the absence of voluntary compliance, in execution of this Decision.

5. Value of the Proceedings

In accordance with what is provided in article 97-A, no. 1, lit. a), of the Code of Procedure and Tax Process (CTTP) and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the proceedings are valued at €159,512.54.

Let it be notified.

Lisbon, 12 December 2017

The Arbiters

José Baeta de Queiroz (arbitrer president)

Tomás Cantista Tavares (arbiter vogal)

Américo Brás Carlos (arbiter vogal – dissenting as per attached declaration, which forms an integral part of this decision)

(Text drawn up by computer, in accordance with article 131, no. 5 of the Code of Civil Procedure, applicable by referral of article 29, no. 1, lit. e) of the Legal Regime of Tax Arbitration)

Dissenting Opinion

I did not vote favorably on this Decision because:

  1. Even before the amendment to lit. a) of no. 1 of article 13 of the Supplementary Regime of the Tax Inspection Procedure (RCPIT), made by Decree-Law no. 36/2016, of 1 July, it was understood, in legal doctrine and case law, that the internal inspection procedure also included the possibility of the tax inspection being able to "request information and clarifications from taxpayers, with corrections possibly being made as a result of what is ascertained"[1]; and, in the same vein: "It is normal, in the context of internal analysis (by the tax administration), to request information, clarifications and justifications from the inspected taxpayers"[2].

  2. This possibility of tax inspection services requesting information and clarifications from the taxpayer is intended to realize, and is adequate to, the first principle governing the tax inspection procedure – the principle of material truth (articles 5 and 6 of the RCPIT).

  3. Furthermore, the nature of the elements specifically requested, the non-coercive manner in which they were requested, the non-imposition of deadlines for response, the absence of reference to any negative effects for the taxpayer in case of non-response[3], respect the principles of equality, proportionality[4], justice, impartiality and good faith, constitutionally established in no. 2 of article 266 of the Portuguese Constitution (CRP), as well as the principles of proportionality, contradiction and cooperation provided in articles 5, 7, 8, 9 of the RCPIT.

  4. The request to the taxpayer, by electronic mail, for answers to questions, for information or clarifications, individualized and concretely identified, made in the terms that appear in the record, fulfills and realizes also, in evident manner, the principle of debureaucratization and efficiency[5], established in article 5 of the Code of Administrative Procedure (CAP), a statute that forms part of the subsidiary legislation of the RCPIT (article 4, lit. d)).

  5. Therefore, the action of the Tax Authority (TCA), did not in this regard violate the applicable principles, but rather realized them.

  6. With regard to the qualification of the aforementioned requests for information and clarifications as an external inspection procedure, I understand that the language of article 13 of the RCPIT does not support, nor did it support at the time of the facts, this conclusion of the Decision. For purposes of the place of execution of the inspection procedure, lit. b) of the provision states that the procedure is "external, when inspection acts are carried out, wholly or partially, in facilities or dependencies of the taxpayers." Now, it is clear to me that, if a clarification, information or document is sent by the taxpayer to the services of the tax administration and analyzed by them, the respective inspection act is carried out in their facilities, and therefore cannot be considered an external inspection act, because only those are which are carried out wholly or partially in the facilities or dependencies of the taxpayers.

  7. Conversely, the act of analysis in the services of the tax administration of a response, an information, a clarification, or a concretely identified document, previously requested, with a view to determining the consistency of the documents in question in light of other elements, can only, in view of the language of the law, be an act of internal inspection procedure.

  8. As to the possibility of, at the limit, the interpretation above followed – with direct correspondence in the law – leading to external inspections being replaced by internal inspections with successive requests for elements to the taxpayer, one must, however, distinguish, concretely, which elements are requested. The question would arise if the tax administration services had, for example, requested information in bulk, such as, for example, the sending of the entire financial accounting of the company, or the overall set of documents supporting the respective entries.

  9. In the case under judgment, however, that is not what occurred. The tax administration services requested some – relatively few, considering the total business information – clarifications or specific information, to carry out the analysis and verify the consistency of information that appears in the declarations to be submitted by the taxpayer, including the accounting and management documentation to be made available in the SIE (Simplified Business Information) declaration and which the taxpayer must necessarily provide annually to the Tax Authority, but also through it to other public entities, such as the National Institute of Statistics, supervisory entities, and the Ministry of Justice - Commercial Registry.

Therefore, all considered, the tax act in question should not have been annulled.

Lisbon, 12 December 2017

Américo Brás Carlos

[1] Joaquim Freitas da Rocha and João Damião Caldeira, Supplementary Regime of the Tax Inspection Procedure (RCPIT) – Annotated and Commented, Coimbra Editora, 2013, p.82; and Decision of the Southern Administrative Court of Justice, of 01/10/2014, case no. 04817/11.

[2] Jesuíno Alcântara Martins and José Costa Alves, Procedure and Tax Process - A Practical Perspective, Almedina, 2015, p. 165.

[3] It appears from the record that, in the face of the non-sending of some requested documents, the new request was, after a reasonable period for such purpose, made in the same informal terms in which it had been initially made.

[4] The Administration must pursue the legal ends, adopting, among the necessary and appropriate measures to achieve these ends, those which entail the least burdens, sacrifices or disturbances to the administered (see Gomes Canotilho and Vital Moreira, Portuguese Constitution, Annotated, Volume II, 4th edition, Coimbra Editora, 2014, p. 801).

[5] See Diogo Freitas do Amaral, Course in Administrative Law, Volume II, Almedina, 2016, p. 276.

Frequently Asked Questions

Automatically Created

What constitutes a prohibited double external tax inspection under Article 13 of the RCPIT in Portuguese tax law?
A prohibited double external tax inspection under Article 13 of the RCPIT occurs when the Tax Authority conducts two separate external inspection procedures covering the same taxpayer, tax period, and subject matter. External inspections involve physical presence at the taxpayer's premises and comprehensive document review. In Process 267/2017-T, the issue arose when an internal inspection (July 2015) led to a proposal for external action, followed by a formal external inspection (June 2016) for IRC 2012. The prohibition protects taxpayers from repeated intrusive procedures that could constitute harassment, waste resources, and violate legal certainty principles. However, transitioning from internal to external inspection when the internal review proves insufficient may not always constitute illegal duplication if properly justified.
How does Article 63(4) of the LGT limit the Tax Authority's power to conduct repeated inspections on the same taxpayer and tax period?
Article 63(4) of the LGT (Lei Geral Tributária) establishes that the Tax Authority cannot repeat inspection or verification procedures concerning the same taxpayer and tax period for matters already inspected, except in specific circumstances such as hierarchical review, new supervening facts, or well-founded suspicion of tax evasion. This provision safeguards taxpayers' rights to finality and prevents the Tax Authority from continuously re-examining closed matters. The limitation applies unless the Tax Authority can demonstrate: (1) discovery of new facts unknown during the first inspection; (2) existence of fraud indicators; or (3) superior authorization based on documented grounds. In Process 267/2017-T, the tribunal examined whether the second external inspection violated this principle, considering that the taxpayer had already provided comprehensive documentation during the initial internal procedure.
Can a corporate income tax (IRC) assessment be annulled if it results from an illegal second external inspection?
Yes, a Corporate Income Tax (IRC) assessment can be annulled if it results from an illegal second external inspection that violates Article 13 of RCPIT and Article 63(4) of LGT. Portuguese administrative law recognizes procedural legality as a fundamental requirement for valid tax assessments. When an inspection procedure is conducted in violation of mandatory legal prohibitions against double inspection, the resulting assessment suffers from a procedural defect that constitutes grounds for annulment. The illegality taints the entire assessment process, making the final tax determination void regardless of potential substantive correctness. CAAD arbitration tribunals have jurisdiction to review both procedural and substantive legality of tax acts. If the tribunal determines that the second external inspection was legally impermissible, it must annul the contested assessment (including compensatory interest) even if the Tax Authority's substantive position regarding expense deductibility might otherwise be defensible.
What legal remedies are available through CAAD tax arbitration to challenge IRC assessments and compensatory interest?
CAAD (Centro de Arbitragem Administrativa) tax arbitration provides taxpayers with several legal remedies to challenge IRC assessments and compensatory interest under the LRTA (Legal Regime of Tax Arbitration - Decree-Law 10/2011). Taxpayers can request: (1) declaration of illegality and annulment of tax assessments based on procedural or substantive grounds; (2) suspension of tax enforcement proceedings by providing bank guarantees or deposits; (3) expedited resolution (typically 6-12 months versus years in administrative courts); (4) specialized arbitrators with tax law expertise; and (5) binding decisions enforceable against the Tax Authority. In Process 267/2017-T, the claimant sought annulment of assessment no. 2016... (€159,512.54) and suspended enforcement proceeding no. ...2010... with a bank guarantee of €202,157.79. The arbitration covered both the procedural issue (double inspection) and substantive issue (financial expense deductibility), demonstrating CAAD's comprehensive review powers.
How did the CAAD rule on the legality of duplicate tax inspections in Process 267/2017-T regarding the 2012 tax year?
In Process 267/2017-T, the CAAD arbitral tribunal (comprised of arbiters José Baeta de Queiroz, Tomás Cantista Tavares, and Américo Brás Carlos) examined whether the Tax Authority's conduct constituted illegal double external inspection for the 2012 tax year. The proven facts established that: (1) an internal inspection in July 2015 resulted in Official Notice stating external action was necessary; (2) a formal external inspection was initiated in June 2016; (3) the taxpayer provided all requested documentation in both procedures; and (4) the external inspection encountered no new facts unknown from the first procedure. The tribunal's analysis focused on whether transitioning from internal to external inspection violated Article 13 RCPIT and Article 63(4) LGT. While the complete decision text is not fully provided, the case centered on determining if the initial internal inspection constituted a completed inspection that precluded subsequent external action, or if the Tax Authority properly escalated to external procedures when internal methods proved insufficient for adequate tax verification.