Process: 322/2017-T

Date: February 15, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

In Process 322/2017-T, the CAAD arbitral tribunal addressed a critical procedural question regarding its own jurisdiction based on the value of the claim in a Corporate Income Tax (IRC) dispute. The case involved a company challenging CIT assessment corrections totaling €1,017,292.53, though the actual additional tax liability was only €6,858.91 due to the company's consolidated tax group status. The sole arbitrator raised ex officio the issue of relative incompetence, questioning whether the tribunal had jurisdiction given the potential discrepancy between the stated claim value (€6,858.91) and the value of corrections being challenged (€817,389.93). Under Article 97-A of the Tax Procedure and Process Code, the calculation of claim value differs depending on whether the taxpayer challenges an assessment act (where the amount sought to be annulled is relevant) or an act determining the taxable base (where the disputed value applies). The Claimant argued the claim value should be €6,858.91, representing the direct economic utility—the amount additionally payable. The Tax Authority concurred with this position. The tribunal's analysis highlighted a fundamental issue in Portuguese tax arbitration: identical fiscal corrections may generate different claim values with significant jurisdictional implications, as single arbitrators at CAAD have limited competence based on monetary thresholds. This case underscores the importance of accurately determining claim value in tax arbitration proceedings, particularly in consolidated group taxation scenarios where individual entity corrections may not directly translate into additional tax liability. The tribunal exercised its duty to raise jurisdictional issues independently while respecting the contradictory principle by allowing both parties to present arguments on the matter.

Full Decision

ARBITRAL DECISION

Report

A… – SOCIEDADE GESTORA DE PARTICIPAÇÕES SOCIAIS, S.A., a collective entity with the tax identification number ("TIN") … (hereinafter referred to only as the Claimant), filed, in accordance with the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011 of January 20, i.e., the Legal Regime for Arbitration in Tax Matters ("LRATM"), a request for the constitution of a sole arbitral tribunal, in order that the illegality of the tax act embodied in the assessment of Corporate Income Tax ("CIT") No. 2017… of January 18, 2017, in the assessment of compensatory interest No. 2017… and in the statement of account adjustment No. 2017…, both dated January 20, 2017, concerning the fiscal year 2012, may be declared.

The Tax and Customs Authority ("Respondent" or "TCA") is the respondent.

In accordance with the provisions of subparagraph a) of paragraph 2 of Article 6 and subparagraph b) of paragraph 1 of Article 11 of the LRATM, the Ethics Council of this Administrative Arbitration Centre ("CAAC") designated the undersigned as sole arbitrator, who communicated acceptance of the assignment within the applicable period, and notified the parties of such designation on June 8, 2017.

Thus, in conformity with the provision in subparagraph c) of paragraph 1 of Article 11 of the LRATM, and through the communication of the President of the Ethics Council of the CAAC, the Sole Arbitral Tribunal was constituted on August 16, 2017.

By order of January 10, 2018, the Sole Arbitral Tribunal, pursuant to subparagraph c) of Article 16 of the LRATM, decided, without opposition from the parties, that it was not necessary to convene the meeting referred to in Article 18 of the LRATM.

Notwithstanding the foregoing, and in accordance with the principle of contradictory proceedings, ensured, in particular, through the right conferred on the parties to pronounce themselves on any questions of fact or law raised in the proceedings, a simultaneous period of fifteen days was granted to both parties to pronounce themselves on the calculation of the value of the claim associated with the present proceedings, initially defined by the Claimant at € 6,858.91.

In fact, considering the value of the adjustments reflected in the tax act whose illegality the Claimant petitions, the Sole Arbitral Tribunal considered that there was a potential situation of relative incompetence arising from the value of the claim considered.

It is noted that any potential relative incompetence is within the tribunal's duty to raise of its own motion and may be decided independently of being raised by the parties.

Nevertheless, and pursuant to the principle of contradictory proceedings, the Sole Arbitral Tribunal considered that, in any case, the decision to be made should be preceded by the possibility of the exercise of contradictory proceedings by the parties.

On February 14, 2018, in accordance with paragraph 2 of Article 18 of the LRATM, the Sole Arbitral Tribunal decided that it was not necessary to produce oral arguments, as the positions of the parties were perfectly defined in their respective pleadings, and set February 16, 2018 as the deadline for the arbitral decision.

Statement of Facts

Having examined the documentary evidence produced, the tribunal finds proven, with relevance to the decision of the case, the following facts:

The Claimant was the dominant company of the perimeter of companies in Group B… taxed under the Special Tax Regime for Groups of Companies, provided for in Article 69 of the CIT Code.

As a result of an external inspection action, concerning the fiscal year 2012, the tax inspection services made a series of corrections to the Claimant's individual result, in the amount of € 1,017,292.53.

As is relevant for present purposes, the Claimant petitions the illegality of the tax act referred to above and, consequently, its annulment with respect to the portion resulting from the following corrections proposed in the course of the inspection action:

An increase in the taxable result of the fiscal year in the amount of € 347,222.21 concerning a positive transition adjustment, based on the provision of Article 5 of Decree-Law No. 159/2009 of July 13 and Articles 18, paragraph 9, subparagraph a) and 45, paragraph 3 of the CIT Code.

An increase in the taxable result of the fiscal year in the amount of € 344,456.71, concerning unremunerated ancillary benefits, based on the provision of Article 23 of the CIT Code.

An increase in the taxable result of the fiscal year in the amount of € 125,711.01, concerning financial charges incurred with the acquisition of capital interests, based on the provision of Article 32, paragraph 2 of the Tax Incentives Statute.

The corrections at issue totaled € 817,389.93, with the difference from the overall value of the corrections proposed (€ 1,017,292.53) not being contested in any way by the Claimant in the context of the request for arbitral pronouncement.

As a result of the inspection action, the Claimant's individual tax result was altered, moving from a tax loss of € 645,228.22 to a taxable profit of € 372,064.31.

Notwithstanding the correction made at the individual level of the Claimant, the tax loss was maintained in the sphere of the consolidated tax return over which it presides, with there being no, therefore, any direct additional burden under CIT by virtue of the corrections at issue.

From the assessment in question resulted an additional amount payable by the Claimant in the total of € 6,858.91, broken down into € 6,042.44 payable by Municipal Surtax by virtue of the individual taxable profit ascertained by the Claimant and, as well, € 816.47 arising from the respective indemnity interest.

The tribunal's conviction regarding the facts found to be proven resulted from the documents attached to the case file and contained in the pleadings and allegations, not challenged, of the parties, as specified in the points of the statement of facts above.

Assessment of the Question of (Relative) Incompetence

Understanding of the Parties

In light of the order issued, the Claimant submitted its response on January 29, arguing for the consideration of the value of the claim proposed in its request for arbitral pronouncement, insofar as the same corresponds to the CIT additionally payable by the Claimant arising from the corrections made in the course of the inspection, arguing that what is at issue is the challenge of a tax assessment act and therefore the value of the claim is that of the amount whose annulment is sought.

The Claimant also concedes that this does not preclude that the legality of corrections to the Claimant's individual result in a total amount of € 1,017,292.53 reflected in the aforementioned tax act may be at issue.

The Respondent, called upon to pronounce itself on the same matter, agrees with the justifications presented by the Claimant for the indication of the value of the claim attributed in the initial petition, which it considers appropriate and pertinent, considering the said value as that of the immediate economic utility of the claim, and therefore reports that it has no objection to the fixing of the same as the value of the claim.

Assessment of the Tribunal

In general terms, the rules relating to the determination of the value of the claim in tax proceedings are currently found in Article 97-A of the Tax Procedure and Process Code ("TPPC"). In general, there is a dichotomy between the challenge of an assessment, in which the amount whose annulment is sought would be relevant [subparagraph a)] and when the act fixing the taxable base is challenged, in which the disputed value would be considered [subparagraph b)].

Now, in cases of determination of the taxable base it is found that, for purposes of determining the value of the claim, the same fiscal corrections may be under discussion, in quantitative terms, but with a different value of the claim – with impact, for example, on the determination of jurisdiction in courts or calculation of costs in arbitration proceedings.

In fact, consider situations in which the TCA may make substantial corrections to the taxable base, without such corrections resulting in any tax payable, considering, for example, the existence of reportable tax losses. In these circumstances, the value of the claim would correspond, therefore, to the value of the corrections themselves being challenged.

On the other hand, in a situation in which the TCA makes identical corrections to the taxable base but, this time, because the taxpayer did not have reportable tax losses, a tax assessment generating an amount payable was created, then, and although, it is reiterated, the same quantification of the taxable base was at issue, the value of the claim would correspond to the value of the assessment – which, as is easily understood, would be vastly lower than the value of the corrections that generated it.

In that case, the tribunal would be called upon to review the legality of the same corrections, potentially arising from a similar inspection procedure, but the value of the action would be diametrically different.

In fact, in administrative proceedings, for example, it could imply the impossibility of appealing a particular decision to a higher instance.

In this regard, it is acknowledged, nonetheless, the potential justification for this different framework in the case in which there is no assessment whatsoever and, therefore, there is no immediate financial impact, whereas in the other case there is an (adverse) immediate impact by requiring payment of an amount (or provision of security) that may never come to pass in the first case, justifying, in part, for example, the reduction of costs (by way of a lower value of the claim) when it is a question of challenging an assessment (although as demonstrated above, this may subsequently impact the possibilities of appeal in administrative proceedings).

However, the principle set forth above cannot override what is the basic principle of equality, constitutionally enshrined.

In this regard, consider the understanding of Jorge Lopes de Sousa (Tax Procedure and Process Code Annotated and Commented, 6th Edition, 2011, Áreas Editora, p. 73):

"In cases in which the act fixing the taxable base is directly challenged, referred to in subparagraph b) of paragraph 1 of Article 97-A, the benefit sought is not equivalent to the 'disputed value,' adopted as the criterion for fixing the value, but rather the tax that would cease to be charged with the alteration of the disputed taxable base value, which will always be much lower than that."

Hence, as the same author states, "(…) in coherence with the legislative option underlying the determination of value provided for in subparagraph a), in these situations of challenging an act fixing the taxable base, one should opt for the determination of the value of the action based on the value of the tax that would be connected with the disputed taxable base."

Thus, he concludes, "Issues may arise here regarding the compatibility of this criterion with the constitutional principle of equality, since the judicial challenge of acts fixing the taxable base in which the challenge of identical value is at issue will have a different value for purposes of taxation on costs, depending on whether or not an assessment act is issued, and it may even happen that a broader challenge corresponds to a lower value of the action. It is thus arguable that the criterion used in subparagraph b) is materially unconstitutional in the face of the constitutional principle of Equality (Article 13 of the Constitution)."

In light of the above context, and arising, above all, from the (still recent) introduction of tax arbitration in the Portuguese legal system, a prudent approach is essential for the proper functioning of this mechanism in analyzing these issues given the possibility of a judgment error harmful to the interests of either party, subsequently subject to the limited possibilities for challenging and appealing arbitral decisions.

In this regard, and not by chance, consider the provision of Article 5 of the LRATM in which the criteria underlying the composition of arbitral tribunals are defined, namely their functioning with a sole arbitrator or with the participation of a collective of three arbitrators.

Now, under subparagraph a), paragraph 2 of the aforesaid article, sole tribunals function when the value of the request for pronouncement does not exceed twice the value of the jurisdiction of the Central Administrative Court (currently the jurisdiction value is € 30,000) and the taxpayer opts not to designate an arbitrator.

On the other hand, arbitral tribunals function with the participation of a collective of three arbitrators when the value of the request for pronouncement exceeds the aforementioned limit of twice the value of the jurisdiction or when the taxpayer opts to designate an arbitrator (regardless of the value of the request for pronouncement).

In this context, it is highlighted as a determining variable for the constitution of a collective tribunal the value of the claim (initially defined by the Claimant), seeking, in this way, to ensure adequate protection of the rights and guarantees of the parties in dispute, by promoting the analysis of the matter by a collective, and not solely by a single arbitrator.

In fact, this constitutes one of the main mechanisms within tax arbitration to ensure the necessary deliberation and discussion of any decision to be rendered, particularly relevant when the value of the claim assumes a potentially material character in the sphere of taxpayers, as defined in the aforementioned Article 5.

In fact, there are multiple references in Article 5 of the LRATM to the "value of the claim," although there is no indication of how to determine it.

In this context, reference is made to subparagraph e) of paragraph 2 of Article 10 of the LRATM, in which reference is made to the "indication of the value of the economic utility of the claim," as one of the requirements of the request for constitution of the arbitral tribunal to be presented by the Claimant.

In fact, the LRATM transfers to the Claimant the responsibility for the initial definition of the value of the economic utility of the claim, although, naturally, it is subject to assessment by the tribunal, as is the case here.

In this context, no other possible conclusion can be envisaged other than that the reference in Article 10 is nothing more than a (still only slightly) more detailed definition of the concept of the value of the claim contained in Article 5.

In this regard, and as developed in learned arbitral decisions (see, by way of example, the decision rendered in the course of case No. 151/2013-T) the subsidiary legislation in relation to the LRATM for this purpose is the TPPC in which are found, in Article 97-A, the express rules for the determination of the value of the claim, potentially applicable to all situations referred to in Article 2, paragraph 1 of the LRATM.

In fact, despite the Tax Arbitration Costs Regulation also containing norms on the determination of the value of the claim, applicable for purposes of costs, it is not to be supposed that recourse should be had to that document to ascertain the methods of determining the values of disputes, above all because of its subsequent introduction to the publication of the entire LRATM.

Furthermore, the potential use of that Regulation (which under Article 12 of the LRATM is the exclusive responsibility of the CAAC, a private, non-profit entity) in the determination of the value of the dispute (understood as the economic utility of the claim) would raise, from the outset, questions related to the binding of the Respondent itself to tax arbitration given that by Ordinance No. 112-A/2011 it is bound to a dispute value up to the maximum amount of € 10 million.

Were this not the case, it would fall within the decision-making sphere of the CAAC the definition of the criteria underlying the binding of the TCA to the tax arbitration mechanism, which would result in interference in a sphere of competence that would naturally not be its, but that of the executive power.

Returning to the concrete case, given that the assessment that embodies the value of the claim proposed by the Claimant and agreed to by the Respondent results solely from the amount payable under Municipal Surtax (and not directly under CIT), the tribunal considers it important, likewise, to highlight the framework of the Municipal Surtax in the Portuguese tax-legal system, which has been the subject of discussion since its introduction.

In this regard, recourse is made, for this purpose, to Constitutional Court Decision No. 197/2013 of May 15, 2013, in which the Municipal Surtax is defined as "(…) a municipal tax, expression, therefore, of the financial autonomy enjoyed by local authorities and specifically by municipalities (…)"

"(…) a tax is deemed additional when it is levied on the collection of the principal tax, and an increment when it is levied on the taxable base of that tax (…) having the surtax come to be calculated from the taxable profit - and no longer from the collection - it must be concluded that it has become, from a legal-financial perspective, an increment to CIT, losing its nature as additional.[1]"

"In light of the new regulatory data, the surtax is assumed as an autonomous tax, in the sense of dependent - read, not ancillary - and the doctrine bases such conviction on the fact that all its essential elements are contained in the law or depend on the will of the municipalities, whose interest is determining in the decision regarding its imposition. Its relationship with CIT is therefore limited, for purposes of its calculation and for reasons of simplicity, to a common tax base, which does not prejudice or obstruct the existence of autonomous tax-legal relationships between the two taxes[2]".

"It is true that the surtax is levied on the taxable profit subject and not exempt from corporate income tax, from which it follows that in cases in which there is no taxation of income, there will also be no obligation to pay the surtax, due to lack of a base of incidence. However, with regard to any other circumstance with repercussions on CIT - e.g., invalidity of the assessment, deductions from the taxable base and from the collection, reductions in the rate - the surtax acquired a status of immunity, effectively detaching itself from the principal tax[3]".

In fact, it is found that the assessment at issue results solely from the impact on Municipal Surtax, with there being no, therefore, any direct additional burden under CIT by virtue of the adjustments made to the Claimant's tax result.

In fact, and arising from the context described, the present tribunal considers that the consideration of the amount payable under an autonomous tax separate from CIT for purposes of determining the value of the claim in the present proceeding, without prejudice to its appearance in the same assessment note, raises well-founded doubts as to ensuring the necessary balance in the definition of the value of the economic utility of the present request for arbitral pronouncement.

In fact, the jurisprudence and doctrine produced on this matter admits the challenges associated with the interpretation of this subject matter, arising from the various sources of law available, not always consistent with each other and which hinder the application of a systematic, simple and clear approach to determining the relevant value, above all to determine the economic utility of the claim and, consequently, the necessity of the same being analyzed within the scope of a Collective Arbitral Tribunal.

By way of example, consider a scenario in which the corrections to the tax result proposed to the Claimant were implemented on a taxpayer established in a municipality in which Municipal Surtax is not applied. This would imply the consideration of a completely different value of the claim, although the underlying reality of the disputed matter would be exactly the same, with the consequences already previously identified.

Consider further the case in which the potential correction amounted to tens of millions of euros, although the assessment reflected a value payable of only € 1 (as a result, for example, of the existence of tax losses), and no value of different economic utility being demonstrated, it would result from this potentially a value of the claim equivalent to the amount payable, with the proceeding being analyzed by a sole arbitrator (there having been no option to the contrary), with clear detriment to all mechanisms for the protection of the rights and guarantees of the parties involved.

In fact, and again emphasizing the necessity of using the tax arbitration mechanism in a conscientious, prudent and responsible manner, it appears to the tribunal that the value of the claim, relevant for purposes of the application of Article 5 of the LRATM, cannot correspond, in this case, to the value of the assessment paid by the Claimant in the amount of € 6,858.91 when there are corrections subject to challenge in the total amount of € 817,389.93.

In this regard, it is also emphasized the necessity of assessing the economic utility of a particular claim not on the basis of its mere immediate effect (which may be very limited or even non-existent), but considering, equally, its potential future impact.

In this context, the present tribunal acknowledges the scarce doctrine and jurisprudence on the concept of the economic utility of the claim relevant for present purposes, recognizing that, in certain situations, this may be susceptible to divergence of position.

In fact, and as extensively discussed previously, the present tribunal considers that a literal interpretation of the value of an assessment note of a tax for the determination of the value of the claim would raise serious issues of inequity and a serious risk in the correct approach in arbitration proceedings[4], for example, in situations in which potential corrections to the tax result of a taxpayer were to be reviewed by a Sole Arbitral Tribunal when, by the provision of the LRATM and by the spirit of the legislature with the introduction of tax arbitration, this should be the subject of review by a Collective Arbitral Tribunal (when the value of the claim is in excess of € 60,000).

In this context, and so as not to empty of meaning the provision of Articles 5 and 10 of the LRATM as regards the value of the claim (understood as the economic utility of the claim), the tribunal considers that there should be considered, no additional information having been made available by the Claimant to the contrary, the amount of € 817,389.93, corresponding to the sum total of the corrections proposed by the Respondent in the course of tax inspection and which are the subject of challenge in this request for arbitral pronouncement.

Decision

The tribunal therefore decides to declare itself incompetent ratione valoris, without prejudice to the provision of Article 24, paragraph 3 of the LRATM.

Value of the Claim

The value of the claim is set at € 817,389.93.

The determination of the value of the claim in this instance does not, naturally, preclude the Claimant from being able to calculate and justify a different value of economic utility, above all given the fact that the right to the deduction of the tax loss ascertained in fiscal year 2012 expired in fiscal year 2017 (since closed).

Costs

It is considered that the only possible value to be considered for purposes of determining the value of the costs in the present proceeding will be that which motivated the constitution of the present Sole Arbitral Tribunal and which, in the case at issue, corresponds to the value of the assessment note received and paid by the Claimant, € 6,858.91.

In accordance with the provision of Article 22, paragraph 4 of the LRATM, the value of the arbitration fee is set at € 612, in accordance with Table I of the aforementioned Regulation, to be borne by the Claimant, given its responsibility for the definition of the value of the claim that resulted in the constitution of the present Sole Arbitral Tribunal.

Let notice be served.

Lisbon, CAAC, February 15, 2018

The Arbitrator

(Sérgio Santos Pereira)

[1] Sérgio Vasques, "The system of local taxation and the surtax," Taxation, No. 38, 2009, p. 121; Jónatas Machado/Paulo Nogueira da Costa, "Municipal surtaxes and the concept of permanent establishment," Studies in Honor of Prof. Dr. J. L. Saldanha Sanches, Coimbra Editora, Coimbra, 2011, p. 854.

[2] Saldanha Sanches, "The surtax, natural resources and the problem of revenue distribution among municipalities," Taxation, No. 38, 2009, p. 137.

[3] Saldanha Sanches, "The surtax, natural resources and the problem of revenue distribution among municipalities," cit., p. 138.

[4] Serena Cabrita Neto and Carla Castelo Trindade in "Tax Dispute Proceedings, Volume II," Almedina, 2017, pp. 172-173.

Frequently Asked Questions

Automatically Created

What is relative incompetence based on case value in Portuguese tax arbitration?
Relative incompetence based on case value refers to the jurisdictional limitation of arbitral tribunals at CAAD concerning the monetary threshold of tax disputes. Under the RJAT (Legal Regime for Arbitration in Tax Matters), single arbitrators have competence only up to certain value limits. When the claim value exceeds these statutory thresholds, the sole arbitrator lacks jurisdiction and the case must be either dismissed for incompetence or transferred to a competent forum. This competence is determined by the economic value of the claim as calculated under Article 97-A of the Tax Procedure and Process Code, ensuring disputes are heard by appropriately constituted tribunals based on their financial significance.
How does CAAD determine jurisdiction thresholds for IRC (corporate income tax) disputes?
CAAD determines jurisdiction thresholds for IRC disputes by applying Article 97-A of the Tax Procedure and Process Code in conjunction with the RJAT provisions. The key distinction lies in whether the taxpayer challenges an assessment act or an act determining the taxable base. For assessment challenges, the claim value equals the amount whose annulment is sought (the tax liability). For challenges to taxable base determinations, the disputed value of corrections applies. In consolidated tax group scenarios, this becomes complex: corrections to an individual company's taxable profit may total hundreds of thousands of euros, yet if the group maintains an overall tax loss, the actual additional tax liability may be minimal, creating significantly different claim values for jurisdictional purposes.
Can a tax arbitration tribunal raise jurisdictional issues on its own initiative under the RJAT?
Yes, under the RJAT, tax arbitration tribunals have the duty to raise jurisdictional issues ex officio (on their own initiative), regardless of whether the parties raise them. This duty extends to questions of relative incompetence based on claim value. However, consistent with the principle of contradictory proceedings enshrined in Portuguese procedural law, the tribunal must allow both parties an opportunity to be heard on the jurisdictional question before deciding. In Process 322/2017-T, the arbitrator granted both parties a simultaneous fifteen-day period to submit arguments regarding the claim value calculation, demonstrating that while tribunals can raise competence issues independently, they must respect parties' procedural rights before rendering a decision on jurisdiction.
What happens when the value of a tax dispute exceeds the competence of a single arbitrator at CAAD?
When the value of a tax dispute exceeds the competence threshold of a single arbitrator at CAAD, the tribunal must declare itself relatively incompetent and the case cannot proceed before that sole arbitrator. The consequences depend on the specific circumstances: the proceedings may be terminated for lack of jurisdiction, or the case may need to be constituted with a three-arbitrator panel if such configuration falls within CAAD's competence limits. The claimant would typically need to pursue alternative remedies, potentially in judicial courts if the value exceeds all CAAD thresholds. This mechanism ensures complex, high-value disputes receive appropriate adjudication by more robust tribunal configurations, protecting both parties' rights and maintaining the integrity of the arbitral system.
How is the case value calculated in IRC liquidation challenges before Portuguese tax arbitration courts?
In IRC liquidation challenges before Portuguese tax arbitration courts, case value is calculated according to Article 97-A TPPC, which establishes different criteria depending on the nature of the challenge. When challenging an assessment act (liquidação), the claim value is the amount whose annulment is sought—the actual tax liability imposed. When challenging the act determining the taxable base (matéria coletável), the value is the disputed amount of the corrections themselves. This distinction becomes particularly significant in group taxation regimes: a company may contest individual corrections of €1 million to its taxable profit, but if the consolidated group result remains a tax loss, the actual additional IRC liability could be zero or minimal (with only Municipal Surtax applying to individual profits), resulting in dramatically different claim values and jurisdictional implications for CAAD competence.