Process: 295/2017-T

Date: October 27, 2017

Tax Type: IRS

Source: Original CAAD Decision

Summary

In Process 295/2017-T, the CAAD arbitral tribunal addressed a critical jurisdictional question regarding IRS business and professional income taxation regimes. The taxpayer, an economist, opted for the organized accounting regime in 2001 for a three-year period but remained classified under this regime until 2014. In 2015, the Portuguese Tax Authority (AT) unilaterally reclassified the taxpayer to the simplified regime, resulting in IRS assessment no. 2016... for €15,717.37. The taxpayer challenged this assessment, arguing that having validly opted for organized accounting, he should remain in that regime until filing a formal declaration of change, which never occurred. The AT raised an exception of absolute lack of jurisdiction ratione materiae, contending that the dispute concerned regime classification rather than assessment legality, thus falling outside the arbitral tribunal's competence under Article 2 of RJAT. The tribunal analyzed whether its jurisdiction extended to examining the legality of assessments based on alleged improper regime reclassification. The arbitrator emphasized that Article 2(1) of RJAT grants jurisdiction over claims for declaration of illegality of tax assessments, and the taxpayer's request specifically targeted the IRS assessment itself, not merely the classification decision. The tribunal distinguished between the immediate object (the assessment) and the grounds for illegality (improper reclassification). This distinction proved crucial: while the substantive dispute involved regime classification, the formal object remained the assessment's legality. The decision highlights the scope of CAAD jurisdiction and confirms that arbitral tribunals may examine assessment legality even when the underlying dispute involves administrative classification decisions affecting taxation methodology. The case underscores the constitutional principle of taxation based on real income and the procedural safeguards available to taxpayers challenging IRS assessments through tax arbitration.

Full Decision

ARBITRAL DECISION

PREAMBLE

A…, taxpayer no. …, resident at Rua …, no.…, ..., Oeiras (hereinafter designated "Applicant"), filed on 27/04/2017, a request for arbitral pronouncement with a view to the examination and declaration of illegality of the income tax assessment on individuals (IRS) no. 2016 …, relating to the year 2015, in the amount of € 15,717.37 (fifteen thousand, seven hundred and seventeen euros and thirty-seven cents).

His Excellency the President of the Deontological Council of the Administrative Arbitration Centre (CAAD) appointed, on 08/06/2017, the signatory of this decision as sole arbitrator.

On 07/07/2017, the arbitral tribunal was constituted.

In compliance with the provisions of article 17, no. 1 of the Legal Framework for Tax Arbitration (RJAT), the Tax and Customs Authority (AT) was notified on 10/07/2017, to, if it so wished, present a reply and request the production of additional evidence.

On 20/09/2017, the AT presented its reply, defending itself by exception and by challenge.

On 27/06/2017, by arbitral order, the Applicant was notified to pronounce on the absolute lack of jurisdiction of the arbitral tribunal ratione materiae.

On 02/10/2017, the Applicant presented a pleading on the exception raised by the AT.

Given that this was exclusively a matter of law, the arbitral tribunal on 03/10/2017 decided to dispense with the holding of the hearing to which article 18, no. 1 of the RJAT refers, based on the principle of the autonomy of the arbitral tribunal in conducting the proceedings, inviting both parties to, if they so wished, present optional written submissions and scheduled the date for delivering the final decision.

On 10/10/2017, the Applicant presented optional written submissions.

On 17/10/2017, the AT presented optional written submissions.

CASE MANAGEMENT

The arbitral tribunal was regularly constituted and is materially competent.

The parties have legal personality and capacity and are properly represented, with no defects in representation.

The proceedings do not suffer from defects that affect their validity.

Consequently, the conditions are met for the final decision to be delivered.

POSITIONS OF THE PARTIES

As the basis of the claim, the Applicant alleges, in summary, that in 2001 he opted for the organized accounting regime and should remain in it until presenting a statement of changes, which did not occur in a timely manner. He further contends that the right to assessment under the organized accounting regime cannot be curtailed by the official reclassification made by the AT, insofar as it would lead to a violation of the alignment of taxation for IRS purposes with the constitutional principle of taxation preferentially based on actual income.

Conversely, the AT argues for the dismissal of the claim and, consequently, for the maintenance of the said assessment, on the ground that, for the Applicant to remain in the organized accounting regime, he would have to exercise that option, thereby avoiding classification under the simplified regime. Not exercising any option in a timely manner, the classification of the Applicant in the simplified regime results from the verification of the legal requirements provided for in article 28, no. 2 of the IRS Code.

FACTS

FACTS CONSIDERED PROVEN

Based on the documents submitted to the proceedings, it is established as proven that:

The Applicant works as an economist and in 2001, opted for the organized accounting regime regarding income from category B (business and professional income) of the IRS.

Although he exercised this option for the three-year period 2001-2003, the Applicant remained classified under the organized accounting regime until 2014.

In 2014, the Applicant declared income of € 183,610.00.

In 2016, the Applicant filed the IRS Model 3 income statement relating to the year 2015 and found that the classification of category B income (business and professional income) had been changed by the AT to the simplified regime, a situation that gave rise to assessment no. 2016 … .

Disagreeing with the decision to reclassify category B income, the Applicant filed, on 22/12/2016, with the AT, a gracious complaint (case no. …2017…) of the said assessment, requesting its annulment on the grounds of illegality, which was rejected by order of the head of the Oeiras Finance Service dated 24/02/2017.

The Applicant filed, on 27/04/2017, the arbitral pronouncement request at issue.

FACTS NOT CONSIDERED PROVEN

There are no facts relevant to the decision that have not been established as proven.

THE LAW

On the absolute lack of jurisdiction of the arbitral tribunal ratione materiae

The AT raises the issue of the absolute lack of jurisdiction of the arbitral tribunal ratione materiae, on the ground that the claim presented by the Applicant amounts to a request for arbitral decision "(…) that determines that the Applicant was classified under the organized accounting regime, and should have the corresponding tax treatment.".

The AT takes the position that this matter does not fall within the scope of competence of tax arbitral tribunals, provided for in article 2 of the RJAT, and thus the object of the arbitral pronouncement request exceeds the jurisdiction of the arbitral tribunal.

Let us examine this.

Article 2, no. 1 of the RJAT establishes that arbitral tribunals are competent to hear claims for the declaration of illegality of tax assessments, self-assessments, withholding at source and payments on account and, likewise, of acts fixing the taxable basis when they do not give rise to assessment of any tax, of acts determining the taxable base and of acts fixing property values. [1]

With regard to the binding of the AT to the jurisdiction of arbitral tribunals, article 4, no. 1 of the RJAT provides that this is delimited by the Order binding the Tax Administration to the jurisdiction of the Administrative Arbitration Centre. [2]

Now, in accordance with article 2 of the aforementioned Order, the General Directorate of Taxes and the General Directorate of Customs and Special Consumption Taxes (currently, AT) bind themselves to the jurisdiction of arbitral tribunals operating at the CAAD whose object is to examine claims relating to taxes whose administration is entrusted to them, in accordance with article 2, no. 1 of the RJAT, in which the claim for declaration of illegality of tax assessments is expressly included.

It is concluded, therefore, that the tax arbitral proceedings have as their object, mediately or immediately, the tax act of assessment, as an act determining the quantitative amount of the tax to be paid (tax collected), by applying a rate to the taxable base.

That said,

From the analysis of the arbitral pronouncement request, it results that the Applicant requests the constitution of the arbitral tribunal with a view to "(…) the annulment of the tax assessment act of Income Tax on Individuals no. 2016…, insofar as the amounts contained in the Assessment are tainted by the vice of illegality (…)".

In fact, the Applicant clearly identifies that the "(…) object of the arbitral claim (mediately) consists, therefore, in the examination of the illegality of the IRS assessment act relating to the year 2015 (…) and (immediately) the Order rejecting the Gracious Complaint (…)".

That is, the declaration of illegality of the tax assessment act of IRS is requested and not "(…) the declaration of illegality of the decision of the Tax Administration that classified it in the simplified taxation regime.".

In fact, arbitral decision no. 118/2012-T, of 16/05/2013, invoked by the AT, by no means allows us to conclude in favor of the exception raised.

Let us see otherwise.

"Now, from the careful reading of the initial petition and evaluation of the documents attached as means of proof, the following conclusions follow regarding the act that is the object of this arbitral proceedings:

1. It is not an act of assessment of a tax, specifically the IRS, insofar as there is no, at the time of filing the initial petition, any assessment of the IRS Model 3 statement either for 2011 or for 2012;

2. Consequently, the declaration of illegality of an assessment act is not requested under Decree-Law no. 10/2011, of January 20, article 2, no. 1, subparagraph a);

3. The request to constitute an arbitral tribunal is made under Decree-Law no. 10/2011, of January 20, article 2, no. 1, subparagraph b), referring to "declaration of illegality of the act of determination of the taxable basis when it does not give rise to assessment of any tax";

4. The claim made in the Initial Petition amounts to a request for arbitral decision that determines that the taxpayer … on 30-03-2011 changed the simplified regime in which he was classified to the organized accounting regime, being from the year 2011 the determination of his income effected on the basis of accounting, as requested by him, and that the IRS Model 3 statement of 2011 filed on 09-05-2012 was filed correctly and timely and should have the corresponding tax treatment;" [underlined in original].

From all the foregoing, it follows that, contrary to what the AT states, the object of the arbitral pronouncement request is the tax assessment act.

The fact is that the Applicant himself, in defining the object of the arbitral claim, restricts the institution of the respective proceedings to the annulment of the IRS assessment act relating to the year 2015, indicating as the value of the economic benefit of the claim the value of the assessment in the amount of € 15,717.37 (fifteen thousand, seven hundred and seventeen euros and thirty-seven cents).

The argument invoked by the AT regarding the lack of jurisdiction of the arbitral tribunal therefore fails, and the exception at issue is judged inadmissible.

On the legality of the 2015 IRS assessment

To assess the legality of the contested IRS assessment and the decision rejecting the gracious complaint filed by the Applicant, it is important to determine whether the Applicant's classification under the simplified taxation regime in the year 2015 is, or is not, valid in light of article 28 of the IRS Code. Its validity or invalidity will imply the correctness, or incorrectness, of the determination of the taxable income of category B (business and professional income) of the IRS obtained by the Applicant in the year in question, with inevitable impact on the amount of tax assessed.

In accordance with article 28, no. 1 of the IRS Code, at the date of the facts, the determination of business and professional income, except in the case of the imputation provided for in article 20, is made: i) based on the application of the rules arising from the simplified regime; or ii) based on accounting. These are, therefore, the two legally admissible methods of determining taxable income relating to the business or professional activity of an individual taxpayer subject to IRS.

The application of one or the other regime depends on the option of the taxpayer, exercised when beginning activity or by the end of March of the year in which he wishes to change the method of determining income, by submitting a statement of changes. [3]

If no express option is made, the taxpayer is automatically classified under the simplified taxation regime if he presents a turnover of less than € 200,000.00 – the limit provided for in article 28, no. 2 of the IRS Code; if the declared turnover is higher than this, the taxpayer is immediately classified under the organized accounting regime.

In order to ensure some stability in the tax relationship, article 28, no. 5 of the IRS Code provided that "The period of permanence in any of the regimes referred to in no. 1 is three years, renewable for equal periods, except if the taxpayer communicates, in accordance with subparagraph b) of the previous number, the change of the regime to which he is subject".

Thus, regardless of the regime applied in the particular case, permanence in the same was mandatory for a minimum period of 3 years, at the end of which the taxpayer could change the initially effected classification. If the taxpayer did nothing, the regime in force would be renewed for a new period of 3 years, and so on successively, except if, in the case of the simplified taxation regime, the maximum limit of turnover was exceeded, in accordance with the terms and conditions provided for in article 28, no. 6 of the IRS Code.

However, following the reform of the IRS, the obligation to remain 3 years, or more, in the simplified regime or in the organized accounting regime in order to change regimes was eliminated. [4]

In fact, as mentioned in the IRS reform bill, "The classification of taxpayers in one or another regime has been a source of significant litigation, related in particular to the existence of a minimum period of three years of permanence.

Furthermore, the rules for classification under the simplified regime of IRS and IRC are different, which translates into greater complexity of the system, with no apparent reason.

It is therefore proposed to repeal the rule that provides for the said minimum period of permanence.". [5]

In light of the new wording of article 28, no. 5 of the IRS Code, the option formulated by the taxpayer remains valid until he proceeds to file a statement of changes, which takes effect from the year in which it is filed, provided it is made by the end of March.

From this it follows that, regardless of whether it is a regime applicable by option of the taxpayer or by legal requirement (for example, in cases where the declared turnover exceeded the maximum allowed limit), the application of the organized accounting regime regarding income from category B (business and professional income) of the IRS earned by the Applicant shall be maintained, except for a change in the option exercised by the taxpayer or a change in the respective admissibility requirements, in the case of the simplified regime.

This is, moreover, the conclusion that results from the understanding of the AT disclosed through Circular no. 2/2016, of May 6, according to which "taxpayers who exercise the option for the determination of income based on accounting under the conditions provided for in article 28, no. 4 of the IRS Code, remain in that regime until manifest otherwise, being irrelevant the variations in the annual amount of net income from category B that may occur." [underlined in original].

Now, in the case at hand, the Applicant was officially classified under the simplified regime with effect from 2015, under article 28, no. 2 of the IRS Code, because it was established that in the year 2014, income from category B of € 183,610.00 was obtained, that is, less than € 200,000.00.

By determination of article 28, no. 5 of the IRS Code, the organized accounting regime relating to the taxation of income from category B in which the Applicant remained classified from 2001 (upon starting activity) is maintained in force until the taxpayer proceeds to file a statement of changes.

In fact, as the Applicant did not submit any statement of change of classification by the end of March 2015, the regime in force – organized accounting regime – would remain applicable.

To this extent, the official classification made by the AT, with effect from 2015, was made in violation of the provisions of article 28 of the IRS Code, therefore the assessment no. 2016 … now contested is, therefore, illegal and invalid and must be annulled.

Having concluded that the IRS assessment act that is the object of this arbitral pronouncement request suffers from the vice of violation of law which imposes its annulment, the examination of the order rejecting the gracious complaint filed is prejudiced, being without purpose.

On the right to compensatory interest

In addition to the annulment of the IRS assessment, and consequent reimbursement of the amounts unduly paid, the Applicant further requests that he be recognized the right to compensatory interest, under article 43 of the LGT.

In fact, in accordance with the provision of article 43, no. 1 of the aforementioned LGT, compensatory interest is due "when it is determined, in a gracious complaint or judicial challenge, that there was an error attributable to the services, resulting in payment of the tax debt in an amount higher than legally due.". In addition to the means referred to in the provision transcribed, we understand that, as follows from article 24, no. 5 of the RJAT, the right to the aforementioned interest may be recognized in the arbitral proceedings and, therefore, we examine the claim.

The right to compensatory interest referred to in the aforementioned LGT provision presupposes that tax has been paid in an amount higher than due and that this derives from an error, of fact or of law, attributable to the services of the AT. In the present case, both conditions are satisfied, thus establishing the obligation for compensatory interest in favor of the taxpayer, which is hereby declared.

DECISION

With the grounds set out above, the arbitral tribunal decides:

To judge the arbitral pronouncement request well-founded and, in consequence, to declare the IRS assessment illegal with all legal consequences;

To judge the claim for recognition of the Applicant's right to payment of compensatory interest as well-founded;

To order the AT to refund the Applicant the tax unduly paid;

To condemn the AT in costs.

VALUE OF THE PROCEEDINGS

The value of the proceedings is fixed at € 15,717.37 (fifteen thousand, seven hundred and seventeen euros and thirty-seven cents), in accordance with article 97-A of the Tax Procedure and Process Code (CPPT), applicable by virtue of subparagraphs a) and b) of article 29, no. 1 of the RJAT and article 3, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

COSTS

Costs to be borne by the AT, in the amount of € 918 (nine hundred and eighteen euros), in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, in accordance with article 22, no. 2 of the RJAT.

Notify.

Lisbon, October 27, 2017

The Arbitrator,

(Hélder Filipe Faustino)

Document prepared by computer, in accordance with the provisions of article 131, no. 5 of the CPC, applicable by reference from subparagraph e) of article 29, no. 1 of the RJAT. The drafting of this decision is governed by the spelling prior to the 1990 Orthographic Agreement.

[1] See article 2, no. 1, subparagraphs a) and b) of the RJAT.

[2] See Order no. 112-A/2011, of March 22.

[3] See article 28, no. 3 of the IRS Code.

[4] See Law no. 82-E/2014, of December 31.

[5] Available at http://www.portugal.gov.pt.

Frequently Asked Questions

Automatically Created

Can a taxpayer who opted for organized accounting be forced into the simplified regime by the Portuguese Tax Authority?
According to Process 295/2017-T, a taxpayer who validly opted for the organized accounting regime should remain classified under that regime until filing a formal declaration of change. The taxpayer argued that the Tax Authority's unilateral reclassification to the simplified regime was improper, as the option for organized accounting creates a stable tax status that cannot be arbitrarily modified by administrative decision. The case involved whether the AT could force reclassification without the taxpayer's formal renunciation of the organized accounting regime through proper declaration procedures.
Does the CAAD arbitral tribunal have jurisdiction over disputes regarding the determination of business and professional income under IRS?
Yes, the CAAD arbitral tribunal has jurisdiction over such disputes. In Process 295/2017-T, the tribunal rejected the AT's exception of lack of jurisdiction, clarifying that while the underlying issue involved regime classification, the formal object of the claim was the declaration of illegality of the IRS assessment itself. Article 2(1) of RJAT expressly grants jurisdiction over claims for declaration of illegality of tax assessments. The tribunal may examine whether an assessment is illegal due to improper application of taxation regime rules, as this affects the assessment's validity.
What happens if a taxpayer fails to submit a timely declaration of changes to their IRS taxation regime in Portugal?
Process 295/2017-T addressed this issue. The taxpayer opted for organized accounting in 2001 for the mandatory three-year period but failed to submit any declaration of change thereafter. Despite this, the taxpayer remained classified under organized accounting until 2014. The case examines whether the absence of a timely declaration allows the Tax Authority to unilaterally reclassify the taxpayer to the simplified regime, or whether the taxpayer's silence maintains the previously chosen regime. The outcome determines whether administrative reclassification without formal taxpayer action is legally permissible.
How does the constitutional principle of taxation based on real income apply to IRS business and professional income in Portugal?
The taxpayer in Process 295/2017-T invoked the constitutional principle that taxation should preferentially be based on actual income. This principle supports the organized accounting regime, which reflects real economic results through proper bookkeeping, as opposed to the simplified regime's presumptive coefficients. The taxpayer argued that forcing reclassification to the simplified regime violates this constitutional mandate by replacing actual income determination with administrative presumptions, particularly when the taxpayer maintains organized accounts demonstrating real income. This principle limits the Tax Authority's discretion in regime classification.
What is the procedure for challenging an IRS tax assessment before the CAAD arbitral tribunal?
Process 295/2017-T illustrates the procedure: the taxpayer first filed a gracious complaint (reclamação graciosa) with the AT on December 22, 2016, which was rejected on February 24, 2017. Subsequently, on April 27, 2017, the taxpayer filed an arbitral pronouncement request with CAAD under Article 2(1) of RJAT, requesting declaration of illegality of the IRS assessment. The arbitral tribunal was constituted, the AT filed a reply raising jurisdictional exceptions, the parties submitted written arguments, and the tribunal issued a decision on the preliminary jurisdictional question before addressing the substantive merits.