Summary
Full Decision
ARBITRAL DECISION
I – REPORT
A..., resident in..., ..., in the United Kingdom, holder of tax identification number ..., came, under the terms of articles 2, no. 1, paragraph a), and 10, no. 1, paragraph a), of the Legal Framework for Arbitration in Tax Matters ("RJAT"), approved by Decree-Law no. 10/2011, of 20 January, to lodge a request for an arbitral pronouncement, whose immediate object is the annulment of the act refusing the administrative appeal no. ...2017... and whose mediate object is the annulment of the assessment acts numbers 2017... and 2017..., relating to personal income tax (IRS) for 2014 and 2015.
The respondent is the Tax and Customs Authority (hereinafter also referred to as "Respondent" or "TA").
The request for constitution of the arbitral tribunal was accepted by His Excellency the President of CAAD and automatically notified to the Respondent.
At issue in the present proceedings are the acts refusing the Administrative Appeal and the personal income tax assessments issued by the TA identified above, with reference to the years 2014 and 2015.
Under the terms of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council of CAAD designated the undersigned as sole arbitrator, who communicated acceptance of the assignment in the applicable terms and timeframe.
The parties were duly notified of this designation and did not express any intention to refuse it, under the terms of article 11, no. 1, paragraphs a) and b) of the RJAT, in conjunction with articles 6 and 7 of the Deontological Code.
The Claimant opted not to designate an arbitrator and, in accordance with the provisions of paragraph c), no. 1, of article 11 of the RJAT, the Arbitral Tribunal was constituted on 2018/09/11.
By order of 12/11/2018 the Tribunal, considering its futility, dispensed with the holding of the meeting provided for in article 18 of the RJAT, given that the parties litigate, in essence, over the legal framework and/or conclusions, with the relevant facts capable of being proven by documentary evidence.
To substantiate its request, it is alleged, in summary:
The Claimant has been residing currently, and since April 2013, in the United Kingdom.
The Claimant filed personal income tax return declarations for the years 2014 and 2015, having declared, in Annex H:
Year 2014: Remuneration earned under cooperation agreements
Year 2015: Remuneration of members of diplomatic and consular missions
The Claimant declared the earned income voluntarily, by mistake, or, more accurately, due to error in interpreting the income declaration form model, as income earned under cooperation agreements (2014) and by members of diplomatic missions (2015).
The Claimant was notified of the personal income tax assessments nos. 2017..., relating to the year 2014, and 2017..., relating to the year 2015, in June 2017.
Within the deadline, the Claimant filed an administrative appeal, in electronic format, through the TA portal – Tax and Customs Authority, against the said tax assessments.
On 2 May 2018, the Claimant was notified of the final decision refusing the administrative appeal.
Given that in the indicated years he was resident in the United Kingdom, he comes to request "the annulment of the act refusing the administrative appeal; the annulment of the impugned assessment acts; the ordering of the Tax Authority to reimburse the corresponding tax and wrongly paid, including the compensatory interest contained in the said assessment acts; the ordering of the Tax Authority to pay indemnificatory interest calculated on the amounts wrongly paid, under the terms of article 43 of the General Tax Law".
The Claimant understands that the assessments are not substantiated as they should have been, in compliance with article 77 of the General Tax Law, article 36 of the Code of Tax Procedure and article 268 of the Constitution.
The lack of substantiation is absolute and total, since there is not a word relating to the facts or legal norms that substantiate the decision. Therefore, the assessments are illegal due to lack of substantiation.
On the other hand, there is a clear case of violation of the principle of cooperation of the tax administration with the taxpayer because the taxpayer expressly requested the cooperation of the tax administration and that request was simply ignored.
The Tax Administration gave the Claimant no opportunity to clarify any data, proceeding with a decision of the administrative appeal procedure that confirms the assessment acts, but which were not substantiated.
The illegality both of the decision of the administrative appeal and of the assessments also arise from the fact that the assessments were made as if they were income earned outside the territory by a taxpayer resident here. That is not the case.
In effect, the Claimant has been tax resident in the United Kingdom since 2013.
In this case, article 15, no. 1 of the CONVENTION BETWEEN PORTUGAL AND THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND TO AVOID DOUBLE TAXATION AND PREVENT FISCAL EVASION IN MATTERS OF INCOME TAX (approved for ratification by Decree-Law 48 497 of 24/07/1968) applies.
From this it follows that, if the Claimant is considered a "tax resident" of the United Kingdom in the years 2014 and 2015, only there can his income be taxed.
The Claimant has employment contracts, which he entered into with entities (companies) based or established in the United Kingdom in which he undertakes to provide work as an employee in the United Kingdom.
The Claimant has held a permanent residence permit in the United Kingdom since April 2012 and paid income taxes and Social Security contributions in the United Kingdom in the years 2014 and 2015.
Contrary to what the Tax Administration contends, the failure to alter the tax domicile registration in Portugal is not determinative of residence status, which is, rather, determined by article 16 of the Personal Income Tax Code.
The impugned assessment acts, by basing themselves on the tax residence of the Claimant in Portuguese territory, a legal presupposition that did not exist, suffer from illegality due to violation of law.
Being the assessment acts illegal – whether due to lack of substantiation, whether due to violation of the cooperation principle, or whether in substance due to error regarding the legal presuppositions – the act refusing the administrative appeal filed by the Claimant against the same is equally illegal due to violation of law, and this act should be annulled.
Notified of the request, the TA responded, alleging the non-existence of the pointed out illegalities, with the following grounds, in summary:
Given the evidence submitted, the TA disputes "all the factual matters alleged by the Claimant, as they do not correspond to the truth, or from which the intended legal effects cannot be drawn".
Portugal has tax authority over income earned abroad if the residence of the holder is fixed in Portuguese territory.
Unaware that the Claimant has earned any income in Portuguese territory, and proceeding from abroad (United Kingdom) those that were declared in the Mod.3 forms filed, these will be taxed in Portugal.
At the date of the facts, the Claimant was registered as tax resident in Portugal, only having altered his domicile to the United Kingdom on 21-07-2018.
As established in nos. 3 and 4 of article 19 of the General Tax Law, communication of the tax subject's domicile to the tax administration is mandatory, with any change being ineffective until communicated.
In light of this, the Claimant could only, in principle, be considered as tax resident in Portuguese territory.
"Notwithstanding the fact that the Claimant only altered his domicile to the United Kingdom on 21-07-2018, if there are elements that make it possible to prove that his tax residence should be considered as being in English territory in the years 2014 and 2015, it appears that this should be recognized and accepted."
Under the terms of no. 1 of article 74 of the General Tax Law, the burden of proof that he is not resident in Portugal / resident in the United Kingdom in the years 2014 and 2015 falls on the Claimant, once he invoked it contrary to his tax registration at the date.
Such proof should have been made by presenting a Certificate of Tax Residence issued by the English tax authorities, as had moreover been indicated to him in the administrative appeal proceedings, and which the appellant failed to obtain.
As can be verified, the document issued by the tax authorities of the United Kingdom presented by the Claimant explicitly states that "This is not a certificate of residence for the purpose of claiming benefits under Double Taxation Agreement with the UK".
The request for alteration of the Claimant's status from resident in Portuguese territory to non-resident produces effects only for the future, as from 21-07-2018, and no request was made to produce retroactive effects.
Furthermore, the alleged error regarding the declaration of residence in Portuguese territory by the Claimant, in the years 2014 and 2015, could never be imputed to the TA, as it is a declaration by the taxpayer himself, which the TA takes as true and in good faith, under the terms of no. 1 of article 75 of the General Tax Law.
Thus, the status of residence in Portuguese territory cannot be contested.
The allegation of the TA's duty to provide substantiation regarding the assessments is unfounded, since the TA merely proceeded to assess 2014 and 2015, on the basis of the declarations presented by the Claimant in the IRS Mod. 3 forms, which it took as true and in good faith, under the terms of no. 1 of article 75 of the General Tax Law.
If it were not so, all assessments issued by the TA on the basis of taxpayers' declarations would have to be considered unsubstantiated due to alleged violation of the duty of substantiation.
The allegation of violation of the duty of cooperation is also devoid of any merit since the TA, when questioned about how to "correct" his situation, informed the Claimant.
The substantiation resulting from the decision that led to the issuance of the tax assessment act is "clear, sufficient and congruent", fulfilling its purpose. So much so that the Claimant, with perfect clarity, both in her administrative appeal and in the present request for an arbitral pronouncement, reveals that she has perfectly understood the cognitive process followed by the tax administration services that led to the decision accused of lacking substantiation.
The request should equally fail due to lack of documentation proving residence in the United Kingdom.
It appears from the information substantiating the decision refusing the administrative appeal, contained in the administrative file, that, despite being requested to do so, the Claimant did not present the original or certified documents issued by the UK tax authority showing that she was tax resident in that State in the years 2014 and 2015.
In the present proceedings it is easily verified that the Claimant failed to make the proof incumbent upon her, under the terms of article 74 of the General Tax Law.
Thus, the residence of the Claimant in the United Kingdom is not proven by the documents submitted with the request for an arbitral pronouncement.
The assessments examined herein do not suffer from any defect of illegality, nor does the administrative appeal decision that confirmed them.
The impugned assessments do not suffer from any error, of fact or of law, therefore the request for recognition of the right to indemnificatory interest should also fail, as the legal presuppositions for recognition of such a right do not exist.
II Sanation
No exceptions were raised and the arbitral request was filed within the deadline established in article 10 of the RJAT.
The parties have legal personality and capacity, are legitimate regarding the request for an arbitral pronouncement and are duly represented, under the terms of articles 4 and 10 of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.
There are no nullities, therefore the Tribunal must decide.
III Reasoning
A – Question to be Decided
The question to be decided in the present arbitral request consists of determining whether the employment income earned in the United Kingdom in the years 2014 and 2015 by the Claimant, where he was subject to taxation, is or is not taxed in Portugal, having regard to the fact that he voluntarily filed Mod. 3 income tax return declarations in which he declared that he had earned income in the UK, and having regard to the circumstance that, both at the date of filing the declarations and at the date of the assessments, the Tax Register and Taxpayer Management System showed that the Claimant is tax resident.
B – The Facts
B.1 – Decision on the Factual Matters and its Substantiation
The Tribunal, with reference to the factual matters, having regard to the legal provisions contained in article 123, no. 2, of the Code of Tax Procedure and article 607, no. 3 of the Code of Civil Procedure, applicable by virtue of article 29, no. 1, paragraphs a) and e), of the RJAT, does not have to pronounce on everything that was alleged by the parties, it being incumbent on it to select the facts that matter for the decision and to indicate what facts are proven and what are not proven.
For adjudication of the case, facts pertinent to the various plausible solutions to the questions at issue in the dispute are selected and delineated (see article 596, no. 1, of the Code of Civil Procedure, by virtue of article 29, no. 1, paragraph e), of the RJAT).
The Tribunal's conviction regarding the facts deemed as proven results from the documents and the Administrative File attached to the proceedings, respectively, by the Claimant and by the TA, in its capacity as Respondent, in accordance with what is specified in the points of the evidence detailed below.
B.2 – Facts Proven
Having examined the allegations contained in the procedural documents submitted and the documentary evidence produced in the proceedings, the Tribunal deems the following facts proven, as relevant to the decision of the case:
On 03/07/2015, the Claimant voluntarily submitted to the TA the Personal Income Tax return Declarations Mod.3 with reference to the years 2014 and 2015.
In the 2014 Mod. 3 declaration he completed in Section 5-B-4 the status of non-resident, and in Section 4 of Annex H, he entered Code 406 (income under article 39 of the Estatuto dos Beneficiários Fiscais) with a declared value of €6,020.00 of income earned abroad.
In the 2015 Mod. 3 declaration he completed in Section 8-B-4 the status of non-resident and in Section 4 of Annex H, he entered Code 401 (income under article 39 of the Estatuto dos Beneficiários Fiscais) with a declared value of €9,339.00 of income earned abroad.
The TA, on the basis of those declarations, proceeded to assess personal income tax in the amount of €1,621.11 (which includes €116.11 of compensatory interest) for 2014 and €2,421.23 (which includes €86.48 of compensatory interest) for 2015.
Both at the date of filing the declarations and at the date of the assessments, the claimant was classified in the Tax Register and Taxpayer Management System as a tax subject resident in the national territory, therefore the TA made the assessments on the basis of that status of tax resident, meaning it considered income earned abroad by a tax subject resident as subject to taxation.
Following notification of the assessments in question, the Claimant filed an administrative appeal alleging that he is not resident for tax purposes in Portugal because he is taxed in the United Kingdom, where he has been tax resident since 2013.
The administrative appeal was refused by order of 23/03/2018, on the ground that the tax subject did not produce proof in accordance with Circular Memo no. 20030, of 18/12/2000, of the Directorate of Services of Tax Benefits.
Attached to the proceedings is proof of the granting of a visa for permanent residence in the UK from 6/04/2012, as per document no.... .
Attached to the arbitral request are proofs of his status as a tax subject in that country issued by B..., one dated 5/06/2018 for the period from 6/04/2013 to 5/04/2015, and another issued on 17/07/2018 for the period from 6/05/2015 to 05/04/2016.
The second document just referred to was submitted by means of a request by the Claimant of 2018/09/24, which was notified to the Respondent on 12/11/2018, for whatever purposes she might deem appropriate, but she said nothing.
In both documents issued by the English Tax Authority, it is stated that the Claimant is resident in the United Kingdom for tax purposes in the periods referred to.
It is considered, given the documentation also attached, that the Claimant bore social security charges, as per declaration issued by the English authorities.
The Respondent attached the Administrative File in which is found a copy of the administrative appeal impugned and attached documents.
There is no proof in the proceedings that the tax was paid, but only that its payment in instalments was requested.
In the order of 12/11/2018 the Tribunal also fixed a deadline for further arguments, which the Claimant submitted, reiterating, in essence, the theses she defended in her Statement of Claim to request the acceptance of the request for annulment both of the administrative appeal decision and of the impugned tax assessments. The TA did not submit further arguments.
B.2 – Facts Not Proven
No other facts not proven are identified as having relevance to the outcome of the specific case.
B.3 – The Law
The claimant, in order to request the annulment of the tax assessed on the basis of the Mod. 3 declarations that she voluntarily submitted, alleges that she did so by mistake, misled into error by her reading of the instructions contained in those forms, but that, even so, she is not subject to taxation in Portugal because her tax residence is in the United Kingdom where she lives, works and pays taxes.
The TA, in turn, taking into account the voluntary submission of the income declarations for the years in question and the fact that in the Register the taxpayer was registered as tax resident in the country, assessed the tax and did not accept annulling the assessments thus made without the taxpayer producing sufficient proof, which, in its view, is the original of the Certificate of Tax Residence issued by the competent authorities of the United Kingdom or certified copy, as established in Circular Memos no. 20022, of 18/05/2000 and no. 20030, of 18/12/2000.
Since the Claimant understands that she is tax resident in the United Kingdom and that actual tax residence is the determining factor in the territorial scope of subjective taxation, invoking this fact, she requested the annulment of the assessments by means of an administrative appeal which did not grant the request with the substantiation expressed above, meaning that in the TA's view the tax subject is registered in the tax register as a resident taxpayer and failed to produce proof of residence abroad in the period in question because she did not produce proof in accordance with the mentioned Circular Memos.
The Claimant requests in the conclusions of her arguments the annulment of the assessment on the grounds of (i) error in the legal presuppositions, (ii) absolute lack of substantiation of the tax act and (iii) violation of the cooperation principle by the TA in the context of the procedure that led to the decision of the administrative appeals, defects that justify the revocation of the decision handed down in the administrative appeal proceedings and, consequently, of the tax assessment acts.
Having regard to what is provided in article 124 of the Code of Tax Procedure, applicable by virtue of article 29, no. 1, paragraph c), of the RJAT, and no defects having been imputed to the acts whose annulment is requested that would lead to a declaration of non-existence or nullity, nor a relationship of subsidiarity indicated (article 101 of the Code of Tax Procedure) between them, the order of examination of the defects should be that which, according to the prudent discretion of the judge, most stably or effectively protects the injured interests.
Thus, what complies with the precepts just mentioned is to decide on the question of the Claimant's tax residence and on the proof she produced regarding that fact, it being certain that the TA did not place in doubt that the declared income is income earned in the United Kingdom (UK) but merely did not accept the proof produced regarding the status of tax resident in that country because such proof was not made through a specific document.
It was proven that the appellant has authorization for permanent residence in the UK from 2012, that the income earned was paid by an entity based in that territory, that income tax was also paid there, that there was taxation for social security purposes, and that the competent tax authority declares that in the period in question the Claimant was resident in the UK for tax purposes[1].
On the other hand, it is also proven and even confirmed by the TA that the Claimant in the period in question did not obtain any income in Portugal subject to taxation and that the income that gave rise to the assessments was that voluntarily declared as having been obtained in the UK.
The Respondent alleges that proof of tax residence can only be made by presenting the original or certified copy of a tax residence certificate issued by the English tax authorities, in accordance with the instructions in force from above.
However, with all due respect, the instructions referred to both in the order refusing the administrative appeal and in the TA's Response relate to situations of proof of tax borne abroad that should be considered as deductible in assessments made in Portugal to tax residents so as to prevent double taxation on the same income.
Indeed, this clearly follows from reading the very title of both Circular Memo no. 20022 and Circular Memo no. 20030, when it seeks to define its scope, referring to "International double taxation – Deduction of tax and charges borne abroad", always on the basis of Conventions signed by the Portuguese State with foreign States precisely to avoid that double taxation of income.
Now, that is not the problem underlying either the administrative appeal or the arbitral request.
The relevant fact is to determine whether the Claimant in the period in question was resident for tax purposes in the United Kingdom and whether the income earned there is, nevertheless, subject to taxation in our country.
Article 13 of the Personal Income Tax Code provides that tax subjects of personal income tax are natural persons who reside in Portuguese territory, and also those who, not residing therein, here obtain income. Therefore, subjective incidence occurs when a natural person is resident, this article establishing the rules that define the concept of tax residence.
The TA understands that the Claimant must be considered tax resident in our country because at the date, both of the obtaining of income in the UK and throughout the entire period until the subsequent alteration of the taxpayer's registration, she was listed in the Tax Register and Taxpayer Management System as being resident in Portugal. The TA draws from the presumption resulting from the registration stated in article 19 of the General Tax Law a rule which, in its view, could only have been overcome in accordance with the determinations provided for in Circular Memos 20020 and 20030. The tax subject should have presented the original or certified copy of a Tax Residence Certificate issued by the competent authorities of the United Kingdom.
It is certain that the TA admits that it would not tax income that was demonstrably earned abroad and that it would rebut the presumption if such proof had been presented[2]. And, on the other hand, the TA considers it decisive that proof of this circumstance would have to be made by presenting the Certificate of Residence in the UK because that is the requirement imposed on the Services by the mentioned Circular Memos.
We have already seen that the form dealt with in those Circular Memos concerns proof of payment of taxes paid abroad, relating to income that should also be declared in Portugal, with a view to preventing double taxation on those same income. The so-called international double taxation.
Moreover, it is accepted that internal instructions issued by the TA do not bind the courts.
Now, what is under examination in the present case is the taxation of income that can only be subject to tax because residence is considered as a subjective element of connection – the principle of universality[3], in taxation arising from tax residence, that is, the resident will be subject to taxation on income earned both in the territory and outside it, although in certain cases he has the possibility of deducting from the tax assessed on those same income the tax borne abroad.
The TA has in its favour the factuality arising from the registration in the Tax Register and Taxpayer Management System regarding which it is necessary to define whether it has an exclusively constitutive character for purposes of fixing subjective incidence or whether it is admissible to prove the contrary to that same registration.
As the appellant points out, it is accepted in doctrine and jurisprudence that the registration, while it may have a constitutive effect, admits proof to the contrary. It is therefore a rebuttable presumption.
The Claimant succeeded in proving, and the TA itself accepts, that she did not earn income in Portugal and that those she declared in Mod. 3 of 2014 and 2015 that served as the basis for the impugned assessments were earned abroad. She also succeeded in proving that the competent tax authority of the United Kingdom considers her subject to taxation there; it is also proven in the proceedings that she was subject to social security payments there and that the income of those years was paid by her employer. It was also established as proven that since at least 2012 the appellant has authorization for permanent residence in the UK and pays taxes from 2013.
In turn, while admitting proof to the contrary inherent in the presumption resulting from the Registration System, the TA considers that both proof of residence and proof of the circumstance that the subject was subject to taxation in the United Kingdom can only be made by presenting a Tax Residence Certificate, all in accordance with what is required by Circular Memo no. 20030 already cited.
But however, in this case, the Convention signed between Portugal and the United Kingdom to prevent international double taxation of income that can be taxed in the two contracting States is not at issue. What is relevant in the specific case is the TA's claim to tax a Portuguese citizen not resident in national territory, relating to income obtained outside national territory, solely on the basis of the Tax Register and Taxpayer Management System.
But the TA is not correct. First, because the said certificate is required for purposes of proof of tax borne abroad with a view to preventing international double taxation, and, second, proof to the contrary, which may be made, given the law's omission on this matter, namely article 19 of the Personal Income Tax Code, may be made by all means admissible in law (article 72 of the General Tax Law and article 115 of the Code of Tax Procedure).
In this conformity, and without need for further in-depth analysis, it is understood that the administrative appeal decision suffers from the defect of violation of law due to error in the legal presuppositions, a defect which also taints the impugned assessments, therefore they cannot subsist in the legal order.
Having regard to the decision, examination of the remaining defects alleged is prejudiced, without prejudice to noting that the assessments were made on the basis of declarations submitted by the Claimant, and the express lack of substantiation may be considered as legitimate. As for non-compliance with the duty of cooperation, it may also be legitimate to accept the TA's conduct in clarifying the doubts raised by the taxpayer as representing more a position of disagreement in relation to positions considered by the tax subject as being the correct ones.
B.4 – Right to Interest
The Claimant also formulates a request for indemnificatory interest calculated on the amounts of payments made under the agreement for payment of the assessments in instalments, not clarifying its grounds.
Even so, there will only be indemnificatory interest when there has been an overpayment of tax, as follows from no. 1 of article 43 of the General Tax Law, which is not relevant to examine in this case.
In fact, it was not proven that the Claimant had made any payment, therefore the request for interest cannot succeed, without prejudice to this right being able to be examined in execution of judgment, if applicable.
IV – Decision
In these terms, the Arbitral Tribunal decides:
to judge the request for an arbitral pronouncement well-founded, annulling the decision of the administrative appeal and, consequently, for the same reasons, annulling the impugned personal income tax assessments;
to judge the request for indemnificatory interest unfounded, without prejudice to the respective right being able to be examined in execution of judgment.
V – Value of the Case
In accordance with the provisions of articles 306, no. 2, of the Code of Civil Procedure and 97-A, no. 1, paragraph a), of the Code of Tax Procedure and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is set at €4,042.24.
VI – Costs
Under the terms of article 22, no. 4, of the RJAT, the amount of costs is set at €612.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.
Lisbon, 10 January 2019
The Sole Arbitrator
José Ramos Alexandre
[1] See the "Letter of confirmation of residence" which expressly states the following: "I confirm that to the best of B…, that Mr. A… of … from 6 April 2015 to 5 April 2016 was a resident of UK for tax purposes".
[2] See article 16 of the Response "Thus, notwithstanding the fact that the Claimant only altered his domicile to the United Kingdom on 21-07-2018, if there are elements that make it possible to prove that his tax residence should be considered as being in English territory in the years 2014 and 2015, it appears that this should be recognized and accepted".
[3] Principle resulting from the joint interpretation of article 1, no. 2 and article 13, both of the Personal Income Tax Code.
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