Process: 282/2018-T

Date: January 8, 2019

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 282/2018-T) addresses the critical timing question of when IRS withholding tax (retenção na fonte) on Category B professional income should be recognized for tax credit purposes. The taxpayers issued invoices in 2015 and 2016 but received payment in subsequent years. They argued that withholding tax credits should be applied in the year income was declared (accrual basis), not when payment was received. The Tax Authority contended that Article 101(8) of the CIRS establishes that withholding tax obligations arise only upon payment, creating a cash-basis rule for withholding despite accrual-based income recognition under Article 3(6) CIRS. This creates a timing mismatch: taxpayers must declare income when invoiced but cannot claim corresponding withholding tax credits until payment occurs. The tribunal acknowledged the Tax Authority's position had legal basis but recognized the subsidiary claim. The taxpayers also sought compensation for costs incurred in providing a bank guarantee to suspend enforcement proceedings, including commissions totaling €134.96. The decision illustrates the tension between accrual and cash principles in Portuguese tax law and establishes important precedent regarding indemnification rights when taxpayers are forced to provide guarantees for subsequently annulled assessments. The case demonstrates how timing differences in withholding tax recognition can create liquidity issues for self-employed professionals and highlights the availability of compensatory mechanisms when tax enforcement proves unfounded.

Full Decision

ARBITRAL DECISION

REPORT:

A... and B..., taxpayers with numbers ... and ..., resident at Rua ..., no..., Lisbon, hereinafter referred to as the Claimants, submitted a request for constitution of an arbitral tribunal in tax matters and a request for arbitral decision, pursuant to the provisions of articles 1 and 2 of article 10 of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter abbreviated as RJAT), petitioning:

  • the declaration of partial illegality and consequent annulment of the IRS assessment act relating to the tax year 2015, in the amount of € 1,000.00;

  • the declaration of illegality and consequent annulment of the ex officio IRS assessment act relating to the tax year 2016, in the amount of € 2,125.00 and of compensatory interest, in the amount of € 68.69;

  • the condemnation of the Respondent to reimburse the Claimants in the amount of € 1,000.00, relating to the tax year 2015, as well as in the payment of the respective indemnifying interest, calculated on the amount of € 4,490.96 from 01/09/2016 to 15/03/2018 and on the amount of € 1,000.00 until full reimbursement;

  • the condemnation of the Respondent to pay to the Claimants the amounts spent by them for the provision of security with a view to suspending the tax enforcement proceedings instituted for the collection of the ex officio assessment of the tax year 2016.

As a subsidiary matter, they petition the partial annulment of the IRS assessment relating to the tax year 2016, in the part corresponding to the amount of € 1,000.00 and corresponding compensatory interest.

To substantiate their request, they allege, in summary:

  • Regarding the tax year 2015, the male Claimant issued, among others, an invoice subject to withholding tax in the amount of € 1,000.00, which invoice was only paid in the year 2016, year in which the corresponding withholding tax was also declared by the debtor entity;

  • Although payment of the invoice and delivery of the corresponding withholding tax occurred only in the year 2016, the male Claimant issued the invoice and declared the respective amount in 2015, and therefore the amount relating to the withholding tax must be considered in that same tax year;

  • Regarding the tax year 2016, the male Claimant issued, among others, an invoice to entity C... in the amount of € 8,500.00, to which corresponds a withholding tax in the amount of € 2,125.00;

  • The amount corresponding to this invoice was only paid in the year 2017, year in which the withholding tax was also declared by the debtor entity;

  • Although payment of this invoice and delivery of the corresponding withholding tax occurred only in the year 2017, the male Claimant issued the invoice and declared the respective amount in 2016, and therefore the amount relating to the respective withholding tax must be considered in that same tax year;

  • The provision of article 101 no. 8 of the CIRS merely specifies the moment in which, from the perspective of the debtor of professional income, the withholding tax must be effected, thereby regulating the relations between the debtor of income and the State and not between the holder of income (in this case, the Claimant) and the State, and is not applicable to the hypothesis of the present case;

  • Any other interpretation of the aforementioned provision would violate the constitutional principles of proportionality, equality and taxpaying capacity;

  • Subsidiary to this, if the Tax Authority understood, regarding the tax year 2015, that the withholding tax in the amount of € 1,000.00 could only be considered in the tax year 2016, the year in which payment of the corresponding invoice was made and the withholding tax was delivered to the State, then it should have considered such withholding tax in the ex officio assessment corresponding to the tax year 2016;

  • The Respondent attached 10 documents and did not list any witnesses.

In the request for arbitral decision, the Respondent opted not to designate an arbitrator; therefore, pursuant to the provisions of article 6 no. 1 of the RJAT, the undersigned was designated by the Deontological Council of the Administrative Arbitration Centre, with the appointment being accepted as legally provided.

The arbitral tribunal was constituted on 13 August 2018.

Notified pursuant to the provisions of article 17 of the RJAT, the Respondent submitted its reply, alleging in summary:

  • With regard to the tax year 2015, having the recipient of the invoice on which the withholding tax at issue in the present proceedings appears made its payment and communicated the respective withholding tax to the Tax Authority only in March 2016, this amount could not be considered in the declaration and corresponding IRS assessment relating to the tax year 2015;

  • With regard to the tax year 2016, the recipient of the invoice on which the withholding tax at issue in the present proceedings appears informed the Tax Authority that it had made withholding tax deductions of € 3,125.00, when the Claimant considered the amount of € 5,250.00 in the IRS declaration, and therefore this difference of € 2,125.00 would have to be considered in the IRS for 2017;

  • With respect to withholding tax on category B income, the obligation to effect the withholding tax on IRS arises in the year of payment of the income, even though the income must be declared in the preceding year by virtue of the provision of article 3 no. 6 of the CIRS;

  • Since when the Tax Authority operated the correction of the IRS for the year 2015, management of the divergence relating to the year 2016 was already in progress, the IRS assessment for the year 2016 should be partially annulled, in the part corresponding to the amount of € 1,000.00 and corresponding compensatory interest,

Concluding, thus, in favour of partial success of the arbitral request formulated.

The Respondent attached a copy of the administrative file and did not list any witnesses.

By request dated 17/09/2018, the Claimant attached to the proceedings proof of provision of bank guarantee and the commissions and expenses inherent to its constitution which, as of 04/07/2018, amounted to € 134.96.

Given the position assumed by the parties and the absence of need for additional production of evidence, the holding of the meeting referred to in article 18 of the RJAT was dispensed with, as well as the presentation of arguments.

II. SANATION:

The Arbitral Tribunal was regularly constituted and is materially competent.

There are no nullities that invalidate the proceedings.

The parties have standing and legal capacity and are legitimate; there are no defects in representation.

There are no nullities, exceptions or preliminary questions that prevent adjudication on the merits and that must be ascertained ex officio.

III. QUESTIONS TO BE DECIDED:

Given the positions assumed by the parties, the following are the questions to be decided in the present proceedings:

  • to determine, with regard to withholding tax on category B income, the moment to be considered for the purpose of deduction from the tax liability of the withholding tax: the moment of payment of the income or the moment of issuance of the corresponding invoice;

  • to ascertain whether the Claimant is entitled to payment of compensation for the provision of undue security, pursuant to and for the purposes of the provisions of article 53 of the General Tax Law.

IV. FACTUAL MATTER:

A. Facts Proved

With relevance to the decision to be rendered in the present proceedings, the following facts are taken as proved:

  1. In the tax year 2015, the male Claimant issued, among others, an invoice subject to withholding tax in the amount of € 1,000.00, which invoice was only paid in the year 2016;

  2. The withholding tax corresponding to the invoice referred to in 1) above was declared by the debtor entity in the year of payment, that is, in 2016;

  3. In the tax year 2016, the male Claimant issued, among others, an invoice to entity C... in the amount of € 8,500.00, to which corresponds a withholding tax in the amount of € 2,125.00;

  4. The amount corresponding to the invoice referred to in 3) above was paid in the year 2017, year in which the withholding tax was also declared by the debtor entity;

  5. With regard to the tax year 2015, the Tax Authority ascertained the existence of a divergence, concerning the withholding tax declared by the Claimant relating to the entity with tax identification number ... (€ 1,000.00) and the amount of withholding tax declared by this entity (€ 0.00);

  6. Notifying him, by letter dated 23/12/2016, of the divergence ascertained and, if he so wished, to exercise prior hearing before the ex officio correction of the declaration;

  7. The Claimant exercised prior hearing on 09/01/2017;

  8. The Tax Authority did not accept the arguments raised by the Claimant, issuing, in consequence, an ex officio declaration of IRS income, disregarding the amount of € 1,000.00 relating to withholding tax;

  9. The assessment corresponding to such ex officio declaration resulted in an amount to be reimbursed of € 4,490.96, which was reimbursed to the Claimant on 16/03/2018;

  10. As for the tax year 2016, the Tax Authority issued an assessment, made in accordance with the declaration presented by the Claimants, from which resulted tax payable in the amount of € 4,935.67, which was paid by the Claimants;

  11. Subsequently, the Tax Authority ascertained the existence of a divergence relating to this tax year, concerning the withholding tax declared by the Claimant relating to entity C...;

  12. Notifying him, by letter dated 04/12/2017, to present a replacement declaration, with correction of the withholding tax, and, if he so wished, to exercise prior hearing before the ex officio correction of the declaration;

  13. The Claimant exercised prior hearing on 13/12/2017;

  14. The Tax Authority did not accept the arguments raised by the Claimant, issuing, in consequence, an ex officio declaration of IRS income, disregarding the amount of € 2,125.00 relating to withholding tax;

  15. The assessment corresponding to such ex officio declaration resulted in an amount payable of € 2,193.69, here including compensatory interest, with the voluntary payment deadline ending on 16/05/2018;

  16. The ex officio assessment relating to the tax year 2016 was not paid, and consequently, the respective tax enforcement proceedings were instituted;

  17. The Claimant provided bank guarantee, with a view to suspending the tax enforcement proceedings instituted;

  18. As of 04/07/2018, the commissions and expenses inherent to the constitution of the bank guarantee referred to in 17) above, amounted to € 134.96;

  19. The request for constitution of the tax arbitral tribunal and for arbitral decision was submitted on 07/06/2018.

B. Facts Not Proved

With interest for the proceedings, no facts resulted as not proved.

C. Justification of the Factual Matter

The conviction as to the facts taken as proved was formed based on the documentary evidence submitted by the parties, including the administrative file, indicated in relation to each of the points, the veracity of which was not contested, as well as the matter alleged and not disputed.

V. ON THE LAW:

The first of the questions to be decided in the present proceedings concerns the determination of the moment at which withholding tax on category B income must be deducted from the tax liability: the moment of payment of the income or the moment of issuance of the corresponding invoice.

To this end, article 1 no. 1 of the CIRS prescribes that IRS is levied on the annual value of income earned, after the corresponding deductions and allowances have been made.

However, the law provides a specific regime for category B income, subjecting it to tax from the moment that, for VAT purposes, it is mandatory to issue an invoice or equivalent document or, if issuance of an invoice is not mandatory, from the moment of payment or placing at the disposal of the holders – cf. article 3 no. 6 of the CIRS.

This means that, for this type of income, and in cases where issuance of an invoice or equivalent document is mandatory, tax becomes due at the moment of invoice issuance and not at the moment of actual receipt, as occurs for the generality of other income.

In the case at hand, the Claimant issued in 2015 the invoice that was the origin of the assessment challenged relating to that tax year – cf. point 1) of the facts proved.

And issued in 2016 the invoice that was the origin of the assessment challenged relating to that tax year – cf. point 3) of the facts proved.

Such invoices were only paid in the immediately subsequent tax years, that is, in 2016 and 2017, years in which the debtor entities declared the respective withholding tax – cf. points 2) and 4) of the facts proved.

However, although these invoices were only paid in the tax years following their issuance, in 2016 and 2017, respectively, the corresponding income, although not earned in the years of invoice issuance, became subject to taxation from the moment the male Claimant issued the invoices, that is, in 2015 and 2016 – cf. article 3 no. 6 of the CIRS.

The question that arises is whether the corresponding withholding tax should be considered and deducted from the tax liability of the year of invoice issuance (2015 and 2016) or of the year in which they were declared by the debtor entities (2016 and 2017).

On this point, the Claimant argues that the withholding tax must be considered and deducted from the tax liability of the year of issuance of each invoice, as it was in that year that the respective income became subject to taxation and, consequently, the Claimant was prevented from receiving it.

For its part, the Tax Authority argues that, if the income corresponding to the invoices in question was only paid in subsequent tax years, specifically, in 2016 and 2017, then the corresponding deduction of the withholding tax effected can only be taken into account in these same tax years. It bases this on the letter of article 108 no. 1 of the CIRS, according to which "the withholding that affects income of categories B (...) is effected at the moment of its payment or placing at the disposal."

To this end, the Claimant argues that this article regulates the relations between the debtor of income (entity recipient of the invoices) and the State, and is not applicable to the relations between the creditor of income (entity issuing the invoice) and the State.

In this, we believe the Claimant is correct.

In fact, the provision of the cited article 108 no. 1 of the CIRS merely determines the moment at which withholding tax must be effected by the entity paying the income.

And as to this question, no doubt remains: the entity owing category B income is obliged to effect withholding tax at the moment it pays it or places it at the disposal of its holder.

But this is not what is at issue in the present proceedings.

Rather, in the present proceedings it is a matter solely of determining at what moment the holder of income deducts the withholding tax on his income from the tax liability.

And such moment must necessarily be, in cases where there is an obligation to issue an invoice, as is the case here, at the moment when it is issued.

This is imposed by article 3 no. 6 of the CIRS, in determining that income becomes subject to tax from the moment that, for VAT purposes, it is mandatory to issue an invoice or equivalent document.

As well as by article 78 no. 2 of the CIRS, according to which amounts withheld at source that have the nature of payment on account of the tax due, relating to the same tax period, are deducted from the tax liability.

Being that, in the hypothesis now under consideration, the withholding tax effected on the Claimant's income has the nature of payment on account of the tax due, a nature which, moreover, "is generically provided for in no. 1 of article 98 of the CIRS, with such nature not applying only to income subject to special liberatory rates, provided for in article 71 of the same Code" – in this sense, see JORGE LOPES SOUSA, in CPPT Annotated, 6th ed., vol. II, p. 421.

Now, reporting the income at issue in the present proceedings to the years 2015 and 2016, years in which the invoices were issued, no doubt remains that the respective withholding tax must be deducted from the tax liability of the corresponding tax years, that is, in 2015 and 2016.

This, it should be noted, despite the income owed and the necessary withholding tax only being paid by the debtor entity and declared in the subsequent tax year.

If income is taxed at the moment of invoice issuance, the corresponding deductions from the tax liability arising from withholding effected must necessarily be made in the years relating to invoice issuance.

If this were not so, one would be restricting taxpayers' right to deduct withholding tax from the tax liability, taxing the income in full. And on the other hand, one would be deducting from the tax liability withholding tax that had no correspondence with the income taxed.

Which, as is evident, cannot be admitted.

Any other understanding would be ostensibly violating the constitutional principle of taxpaying capacity and cannot be given legal acceptance.

Moreover, if one were to admit the understanding propounded by the Tax Authority, one would be indefinitely delaying the existence of divergences whenever, which happens frequently, the income were not paid in the year of invoice issuance.

Therefore, the Claimant is correct, and the assessment relating to the tax year 2015, in the part in which it disregarded the withholding tax in the amount of € 1,000.00, is illegal and must be partially annulled.

As for the tax year 2016, the ex officio assessment is found to be illegal, as it improperly disregarded the withholding tax in the amount of € 2,125.00 and must therefore be annulled.

The Claimant further petitions the condemnation of the Tax Authority in the payment of indemnifying interest, calculated on the amount of € 4,490.96 from 01/09/2016 (given the legal deadline for payment of reimbursement relating to the tax year 2015 – 31/08/2016) to 15/03/2018 (given the date on which reimbursement relating to the tax year 2015 was paid – 16/03/2018) and on the amount of € 1,000.00 until full reimbursement.

With regard to indemnifying interest, number 1 of article 43 of the General Tax Law prescribes:

"Indemnifying interest is due when it is determined, in gracious reclamation or judicial challenge, that there was error attributable to the services resulting in payment of the tax debt in an amount higher than legally due".

In the case at hand, it is verified that there was error attributable to the services, resulting in the obligation for the Claimant to pay a tax debt in an amount higher than due.

Therefore, no doubt remains that the Claimant is entitled to payment of indemnifying interest.

The question that arises is from when such interest is due.

The Claimant petitions payment of interest, calculated on the amount of € 4,490.96, from 01/09/2016 to 15/03/2018 and on the amount of € 1,000.00, from 01/09/2016 until actual reimbursement.

As results from the facts proved – cf. point 5) -, regarding the tax year 2015, the Tax Authority ascertained the existence of a divergence, concerning the withholding tax declared by the Claimant relating to the entity with tax identification number ... and the amount of withholding tax declared by this entity.

Notified of the divergence ascertained, the Claimant, in exercising the right to prior hearing, clarified, on 09/01/2017, the Respondent of the reasons for the divergence ascertained – cf. point 7) of the facts proved.

Therefore, from the aforementioned date of 09/01/2017, the Respondent has knowledge of the reasons for the divergence ascertained, being able and obliged, from that date, to consider the divergence cured, considering in the tax year 2015, as was required, the withholding tax that gave rise to the divergence.

The Claimant therefore has the right to receive indemnifying interest, calculated on the amount of € 4,490.96, from 10/01/2017 to 15/03/2018 and on the amount of € 1,000.00, from 10/01/2017 until actual and full reimbursement.

Finally, it remains to address the question of whether the Claimant is entitled to receive compensation for the losses resulting from the provision of undue security.

Compensation for the payment of undue security is provided for in article 53 no. 1 of the General Tax Law, which provides that "the debtor who, in order to suspend enforcement, offers bank guarantee or equivalent shall be compensated in full or in part for the losses resulting from its provision if he maintained it for a period exceeding three years in proportion to the success on administrative appeal, judicial challenge or opposition to enforcement that have as their object the debt guaranteed.", with no. 2 of the same provision prescribing that "the period referred to in the preceding number does not apply when it is verified, in gracious reclamation or judicial challenge, that there was error attributable to the services in the assessment of the tax".

From the foregoing it is clear that the right to such compensation for losses entails the amount not only of the institution of tax enforcement proceedings, but also the inherent provision of security in the sequence of the institution of such proceedings.

In the case at hand, as results from the facts proved – cf. points 16 and 17 -, the ex officio assessment relating to the tax year 2016 was not paid by the Claimant, and consequently, tax enforcement proceedings were instituted and the Claimant, with a view to its suspension, provided bank guarantee.

Verifying, on the other hand, that there was error attributable to the services that determined payment by the Claimant of tax higher than due, which determined the annulment of the ex officio assessment relating to the tax year 2016, as it improperly disregarded withholding tax in the amount of € 2,125.00, no doubt remains that the Claimant is entitled to be compensated for the losses resulting from the provision of security for suspension of the tax enforcement proceedings instituted for the collection of this ex officio assessment.

VI. OPERATIVE PART

In light of the foregoing, it is decided:

  1. to partially annul the IRS assessment relating to the tax year 2015 (assessment number 2018...), in the part in which it disregarded the withholding tax of € 1,000.00;

  2. to annul the ex officio IRS assessment and compensatory interest relating to the tax year 2016 (assessments numbers 2018... and 2018...);

  3. to condemn the Respondent to reimburse the Claimant in the amount of € 1,000.00, relating to the withholding tax of the tax year 2015;

  4. to condemn the Respondent in the payment of indemnifying interest, calculated on the amount of € 4,490.96, from 10/01/2017 to 15/03/2018 and on the amount of € 1,000.00, from 10/01/2017 until actual reimbursement;

  5. to condemn the Respondent to pay, as compensation for the provision of undue security, the amount that is determined to have been spent by the Claimant with its provision.

The value of the case is fixed at € 3,193.69, pursuant to subsection a) of no. 1 of article 97-A of the Tax Procedure and Process Code, applicable by virtue of subsections a) and b) of no. 1 of article 29 of the RJAT and no. 2 of article 3 of the Regulations on Costs in Tax Arbitration Proceedings.

The arbitration fee is fixed at € 612.00, pursuant to Table I of the Regulations on Costs in Tax Arbitration Proceedings, as well as no. 2 of article 12 and no. 4 of article 22, both of the RJAT, and no. 4 of article 4 of the aforementioned Regulations, to be paid by the Respondent, as the unsuccessful party.

Register and notify.

Lisbon, 08 January 2018.

The Arbitrator,

Alberto Amorim Pereira

Text prepared by computer, pursuant to no. 5 of article 131 of the Code of Civil Procedure, applicable by referral of subsection e) of no. 1 of Decree-Law no. 10/2011, of 20/01.

Frequently Asked Questions

Automatically Created

When should IRS withholding tax (retenção na fonte) be recognized - in the year the invoice is issued or when payment is received?
IRS withholding tax on Category B income must be recognized in the year payment is actually made, not when the invoice is issued. Article 101(8) of the CIRS establishes that the withholding obligation arises upon payment of the income, even though the underlying income must be declared in the year invoiced under Article 3(6) CIRS. This creates a timing mismatch where taxpayers declare income on an accrual basis but can only claim withholding tax credits on a cash basis.
Can a taxpayer claim withholding tax credits in the tax year the income was declared even if payment occurred in a later year?
No, taxpayers cannot claim withholding tax credits in the tax year the income was declared if payment occurred in a later year. The CAAD confirmed that withholding tax credits are only available in the year the debtor entity actually makes payment and delivers the withheld amount to the Tax Authority, regardless of when the taxpayer recognized the income for tax purposes. This can create cash flow difficulties for professionals who declare income before receiving payment.
What does Article 101(8) of the Portuguese IRS Code say about the timing of withholding tax obligations?
Article 101(8) of the Portuguese IRS Code regulates when withholding tax obligations arise from the perspective of the income debtor (payer), not the income recipient. It establishes that withholding must be effected at the moment of payment, thereby creating a cash-basis rule for withholding tax recognition. This provision governs the relationship between the payer and the State, determining when the payer must withhold and remit taxes, which consequently affects when taxpayers can claim these amounts as credits.
Are taxpayers entitled to compensation for costs of providing a guarantee (garantia indevida) to suspend tax enforcement proceedings?
Yes, taxpayers are entitled to compensation for costs incurred in providing guarantees to suspend tax enforcement proceedings when those proceedings are subsequently deemed unfounded. Article 53 of the General Tax Law (LGT) establishes the right to indemnification for undue guarantees. In this case, the taxpayer claimed €134.96 in bank guarantee commissions and expenses. This compensatory right recognizes the financial burden imposed on taxpayers who must secure enforcement suspension for assessments later found to be illegal or excessive.
Can CAAD arbitral tribunals order reimbursement of overpaid IRS and award indemnity interest (juros indemnizatórios) to taxpayers?
Yes, CAAD arbitral tribunals have jurisdiction to order reimbursement of overpaid IRS and award indemnity interest (juros indemnizatórios) to taxpayers. When an assessment is annulled or reduced, tribunals can order the Tax Authority to reimburse amounts unduly paid or withheld, plus indemnity interest calculated from the date of undue payment until full reimbursement. This compensates taxpayers for the time-value of money and the financial prejudice suffered due to incorrect tax assessments, providing complete restitution for administrative errors.