IRS Category F Expense Deduction Under Article 41 CIRS – Arbitral Decision Reformed After TCA-Sul Annulment

ARBITRAL DECISION REFORMING AND REPLACING THE DECISION OF 04-01-2017, IN ACCORDANCE WITH THE JUDGMENT OF THE TCA-SOUTH WHICH ORDERED ITS ANNULMENT.

Maria do Rosário Anjos, arbitrator appointed by the Deontological Board of the Center for Administrative Arbitration in the case aforesaid, notified of the Official Notice with the reference..., of 10-11-2017, from the tax litigation section of the South Central Administrative Court (TCA South) and of the respective Judgment rendered within the scope of the appeal proceedings with no. 16/17.8BCLSB, which decided to annul the arbitral decision rendered by this arbitral tribunal, comes, in accordance herewith, to proceed with its reformation and replacement, in the following terms:

REFORMATION OF THE ARBITRAL DECISION

The judgment of the TCA South decided the appeal against the arbitral decision filed by the Honourable Director General of the Tax and Customs Authority, which delimited the scope of the appeal in the following manner:

"a) The object of this appeal is the decision segment contained in section p) of the decision, insofar as it fixes the quantum of the guarantee cost to be indemnified;

b) The decision suffers, regarding the segment identified above, from the defects of non-specification of the factual grounds justifying the decision and of improper pronouncement, respectively, sections a) and c) of no. 1, of article 28 of RJAT. (...)"

By Judgment of 12/07/2017, notified to CAAD on 10-11-2017, the TCA South decided, with one dissenting vote, to annul the arbitral decision, as it considered that, regarding the question raised in the appeal proceedings, the substantiation of the decision on the facts did not contain the grounds justifying the probative conviction, "with respect to the decision segment under scrutiny", that is, regarding the value of the cost incurred with the provision of the guarantee.

In this manner, it is necessary to reform the decision in consonance with the decision rendered by the T.C.A. South, maintaining the annulment of the additional IRS assessment act, relating to the year 2014, with no. 2016..., reducing the condemnation in the segment relating to the indemnification for the provision of the guarantee, after amendment of the point of the factual matter forming the basis of the appeal against the arbitral decision, its respective substantiation of the factual matter [(Part III, A) – section p); B and C)], adjustment of the final decision and responsibility for the costs of the proceedings [(Part V, c) and d)].

This shall be done hereinafter.

I – REPORT

A) The Parties and the Constitution of the Arbitral Tribunal

1. A..., taxpayer no. ..., with tax domicile at Avenue ... no. ..., ..., ...-..., Lisbon (hereinafter designated as "Claimant"), requested the constitution of an Arbitral Tribunal, under the terms of article 2, no. 1, section a) and 10, nos. 1 and 2 of Decree-Law no. 10/2011, of 20 January, hereinafter designated as "RJAT" and of Ordinance no. 112 – A/2011, of 22 March, for the challenge and declaration of illegality of the additional IRS assessment relating to the year 2014, with no. 2016..., issued on 06-02-2016, in the amount of €17,291.63, with an outstanding debt balance of €15,296.35 and payment deadline until 06-04-2016, seeking its annulment.

2. The request for constitution of the Arbitral Tribunal was filed by the Claimant on 22-06-2016, was accepted by the Honourable President of CAAD on 23-06-2016 and immediately notified to the Tax and Customs Authority. The Claimant chose not to appoint an arbitrator, therefore, under the terms of no. 1, of article 6 of RJAT, the undersigned was appointed by the Deontological Board of the Center for Administrative Arbitration, on 25-08-2016, as arbitrator for the constitution of a single Arbitral Tribunal. Thus, in accordance with the provision of section c), of no. 1, of article 11, of RJAT, with the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the Arbitral Tribunal was constituted on 12-09-2016.

On 14-09-2016 an arbitral order was rendered, for the Tax and Customs Authority (TA) to submit its response within the legal deadline, in the terms and for the purposes of nos. 1 and 2 of article 17 of RJAT.

1. On 13-10-2016 the Respondent filed the Administrative Process (AP) with the case and on 17-10-2016 its response, which are hereby deemed fully reproduced. In its response, the Respondent invokes the exception of untimeliness of the arbitral request, the incompetence of the Tribunal and, merely as a precaution, contests the arguments of the Claimant. Finally, it considers that the issues under discussion are exclusively matters of law and, for this reason, requests the waiver of the holding of the meeting referred to in article 18 of RJAT.

2. On 26-10-2016 an arbitral order was rendered waiving the holding of the meeting provided for in article 18 of RJAT, since upon examination of the arbitral pronouncement request submitted by the Claimant, properly documented, the Response and the AP filed with the case by the TA, it is verified that the documentary evidence filed with the case is sufficient for the decision to be rendered. The issues to be decided, considering the position of the parties intervening in the proceedings, embodied in their respective pleadings filed with the case, are exclusively matters of law. Furthermore, in the response presented, the TA expressly requested waiver of holding the meeting referred to in article 18 of RJAT. Accordingly, the holding of the meeting provided for in article 18 of RJAT was waived and a deadline, equal and successive, of 10 days was set for the submission of optional written submissions, with the proceedings then continuing to final decision to be rendered by 20 December 2016. On this date, a new arbitral order was rendered extending the deadline by a further 15 days, as it was not possible to complete the arbitral decision within the initially set deadline.

The parties were invited to send their respective procedural documents to the case in Word format and the Claimant was notified to make payment of the subsequent arbitration fee by 10 days before the date set for final decision.

The parties submitted no submissions.

B) THE REQUEST FILED BY THE CLAIMANT:

1. The Claimant files the present arbitral pronouncement request, seeking the declaration of illegality of the additional IRS assessment relating to the year 2014, invoking the following grounds:

a) Defect of form, due to omission of an essential formality of hearing of the Claimant, since, the Claimant alleges, the assessment (final act) was issued even before the deadline had elapsed for the taxpayer to exercise its right of hearing, which means that the principle of prior hearing, provided for in the law, was not respected;

b) Defect of form due to lack of substantiation, since the TA proceeded to the additional assessment without indicating minimum substantiation for the corrections it made;

c) Defect of violation of law by material violation of the provisions of articles 41 and 55 of CIRS, given that the disregard of the expenses presented by the Claimant, relating to works carried out on the leased properties, constitutes a clear violation of the provisions of these legal provisions.

Therefore, it concludes for the illegality of the impugned assessment, requesting its annulment, with the legal consequences, and further, the reimbursement of the costs incurred with the voluntary mortgage to suspend the tax enforcement proceedings, which it fixed at €700.00.

C – THE RESPONSE OF THE RESPONDENT

1. In its response the TA comes to argue for the legality of the assessment and the dismissal of the request.

It argues in summary, regarding the defect of form, that although the assessment was issued before receiving the Claimant's pronouncement in the prior hearing stage, the truth is that facing this situation the services did not disregard the arguments of the taxpayer, as they converted the response into an administrative complaint, as shown in the AP. Thus, within the scope of the administrative complaint proceedings they repeated the notification for prior hearing of the taxpayer, and the latter chose not to make any pronouncement.

As for the defect of substantiation, it argues that, as results from the entire statement of reasons supporting the arbitral request filed, the Claimant understood very well what the reasons for the corrections were. It invokes some doctrine and case law to conclude that the assessment act is properly substantiated.

Finally, regarding the defect of violation of law, it also understands that this does not occur, given that the corrections made relate to expenses that are not, in the TA's understanding, properly documented and that cannot be considered as relevant or deductible in light of the provisions of article 41 of CIRS. Thus, with all the argumentation it develops throughout the final part of its response, and which is hereby deemed fully reproduced, the Respondent concludes that the corrections made are appropriate and correspond to the correct interpretation of the law.

1. The Claimant and the Respondent thus disagree regarding the issues outlined, which are exclusively matters of law and on which it is necessary to decide.

II - PROCEDURAL REQUIREMENTS

1. The Arbitral Tribunal is regularly constituted.

2. The Parties enjoy legal personality and capacity, are legitimate and are legally represented (see articles 4 and 10 no. 2 of RJAT and article 1 of Ordinance no. 112/2011, of 22 March).

3. The proceedings do not suffer from defects that would invalidate them.

III – Factual Matter

A) Established Facts

1. As material factual matter, this tribunal finds established the following facts:

• The claimant submitted its IRS declaration relating to the year 2014, on 31-05-2015, through submission via the ATA website;

• Accordingly, an IRS tax assessment was issued, with the amount payable of 631.77, which the claimant paid;

• On 07-07-2015 the claimant was notified of the need to provide evidence of the elements contained in the IRS declaration, relating to the year 2014, namely the expenses with leased properties;

• On 03-08-2015 the claimant, by registered letter, sent a detailed explanation of the expense values presented and the reasons that determined such expenses, including some improvement works on inherited properties in poor state of conservation, so as to allow their leasing;

• The claimant explained the rationale for each of the expenses presented and attached nine documents;

• It further attached a substitute declaration, with a correction that it assumed as being due;

• On 06-08-2015, an additional IRS assessment was processed, by virtue of the substitute declaration delivered by the taxpayer, in the amount of €1,365.28, which was paid in full;

• On 09-12-2015 the claimant was notified by registered mail, to exercise its right of prior hearing within 15 days on the draft decision for correction of the values entered in Form 3, annex F;

• The corrections to be made were as follows:

[THIS IS TABLE:
Annex | Section | Field | Declared Value | Value to Correct | Final Value
F | 04 | 402 | €691.04 | €500.00 | 191.04
F | 04 | 408 | €41,086.68 | €40,985.27 | 101.41
]

• On 29-12-2015, on the last day of the set deadline, the claimant sent its response in the prior hearing stage, by registered mail and attached three further documents;

• On the same date, that is, on 29-12-2015, the notification of the final decision to proceed with the corrections made was issued and sent to the claimant;

• The TA converted the claimant's pronouncement, in the prior hearing stage, into administrative complaint proceedings, within the scope of which it notified the claimant to exercise its right of hearing;

• The TA maintained the initially announced corrections, on the grounds that, even after the elements submitted by the claimant in the prior hearing stage, "the declared elements were not proven";

• It maintained the initially announced corrections contained in the table referenced above in item i);

• On 06-02-2016 the additional IRS assessment was issued, with no. 2016..., for the amount of €17,291.63, with an outstanding debt balance of €15,926.35 and payment deadline until 06-04-2016;

p. The Claimant constituted a unilateral voluntary mortgage to suspend the tax enforcement proceedings, having incurred a cost of €225.00, as shown in Doc. no. 1 attached to the arbitral request;

q. The present arbitral request, for annulment of the tax assessments, was filed on 22-06-2016.

B) FACTS NOT ESTABLISHED

1. It is considered as not established that the Claimant incurred the amount of €700.00 with the constitution of the guarantee, since the case file contains only the documentary proof of payment of the fee incurred with the constitution of a unilateral mortgage, from which it is extracted that payment was made of 225.00 (see Doc. no. 1 attached to the arbitral request), as stated in section p) of the established facts.

With relevance to the decision, there are no other facts that should be considered as not established.

C) SUBSTANTIATION OF THE ESTABLISHED FACTS

1. The facts described above were established based on the documentary evidence that the parties presented to this proceeding, the Claimant together with the arbitral request filed and the Respondent with the filing of its administrative process. The factual matter established contained in sections a) to o) has as its basis the documentary evidence contained in the 10 documents attached by the Claimant to the arbitral request, consistent with the documents contained in the Administrative Process filed by the TA. The factual matter contained in section p) given as established is based on document no. 1 attached to the arbitral request, which contains a copy of the deed of constitution of a unilateral mortgage in favor of the TA and the respective documentary proof of payment made by ATM, relating to the cost of the notarial act.

It should be noted that, regarding the factual matter, the Tribunal does not have to rule on everything that was alleged by the parties, its duty being, instead, to select the facts that matter for the decision and to distinguish the established matter from the unestablished, as provided in article 123, no. 2, of CPPT and in article 607, no. 3 of the Code of Civil Procedure (CPC), applicable ex vi article 29, no. 1, sections a) and e), of RJAT. In this manner, the facts relevant to the adjudication of the case are selected and defined according to their legal relevance, which is established in view of the various plausible solutions of the legal issue(s) (see article 596, applicable ex vi article 29, no. 1, section e), of RJAT. Taking into consideration the positions assumed by the parties, the documentary evidence and the AP filed with the case, it was considered established, with relevance to the decision, the facts listed above, which are moreover consensually recognized and accepted by the parties.

IV – ON THE LAW

1. With the factual matter established as stated above, it is necessary to address the legal issues raised by the parties, beginning necessarily with the formal defects invoked by the Claimant.

Article 124 of CPPT, applicable ex vi article 29, no. 1, section a), of RJAT, provides as follows:

"1. In the judgment, the court shall assess prioritarily the defects that lead to the declaration of non-existence or nullity of the impugned act and, thereafter, the defects argued that lead to its annulment.

In the aforementioned groups the assessment of the defects is made in the following order:

a) In the first group, those defects whose procedence determines, according to the judicious discretion of the adjudicator, more stable or effective protection of the injured interests;

b) In the second group, that indicated by the appellant, whenever the latter establishes a relationship of subsidiarity among them and no other defects are argued by the Public Prosecutor or, in all other cases, that fixed in the preceding section."

1. This legal provision establishes a priority for the assessment of the defects of the impugned act. Thus, the defects whose procedence determines, according to the judicious discretion of the adjudicator, more stable or effective protection of the injured interests, should first be assessed, which leads us to question the understanding to be given to this criterion. According to case law of the Supreme Administrative Court (STA), this principle would lead to giving priority to the assessment of substantive defects of the act over formal defects, since the latter do not prevent the renewal of the act, and it is certain that this appears to be the understanding that privileges more effective protection of the injured interests.

2. Expressly citing some case law of the STA, which synthesizes the understanding of this superior Court, it results, among others, from the judgment rendered on 17.11.2010, the following: "(…) the case law of this Supreme Court has repeatedly explained, within the scope of the interpretation of the normative content of the analogous rule contained in article 57 of LPTA, that although the more effective protection of the interests of the appellant imposes, in principle, the priority assessment of substantive or fundamental defects in relation to formal defects, particularly the defect of lack of substantiation (given that the verification of this does not prevent the renewal of the act with equal legal configuration, naturally expunged of the defect that led to its annulment)."

However, it also results from this case law of the STA, reaffirmed in many other Judgments, that this rule is not absolute, since it may happen that, for example, only the substantiation of the act may reveal substantive defects through the clarification of the factual and legal framework in which the impugned act was based. Which means that, invoked the defect of lack of substantiation, in the case that this is effectively verified, the Court may not be in a position to proceed with the assessment of the substantive defects, for not having all the available and essential elements to do so. The precedence of the formal defect can be justified when the inquiry into the concrete motivation of the act proves indispensable to the control of the substantive (fundamental) defects of the act.

It is thus concluded that the more effective protection of the interests of the appellant may pass through the priority assessment of formal defects, specifically the defect of lack of substantiation, whenever the discovery of the motivation of the act may offer elements necessary to the judgment of verification of the substantive defects, which occurs whenever there is an absolute lack of substantiation (of fact and/or law), thereby implying the impossibility of knowledge of the facts on which the act was based and/or its legal framework, making impossible the jurisdictional control of the substantive defects.

In other words, the priority assessment of the formal defect shall cease to be required, whenever the alleged lack or insufficiency of substantiation proves, in the concrete case (and the assessment must obviously be case-specific) irrelevant for the assessment and eventual procedence of the substantive defect or defects that have been concretely alleged.

1. In the concrete case of the present proceedings, it is concluded that none of the defects invoked by the claimant is capable of generating nullity of the act. As for the invoked defects of violation of the right of hearing and lack of substantiation, regardless of whether they are capable of generating annulment of the act, following the case law cited above, we are confronted with the question of whether maximum effectiveness in protecting the interests of the claimant would impose, in principle, the priority assessment of the defect of violation of law in relation to the formal defect of lack of substantiation. However, in the case under review, the assessment of the formal defects, particularly the defect of lack of substantiation, is necessarily imposed as prior to the assessment of the alleged violation of law, as shall be demonstrated.

A) Regarding the alleged omission of an essential formality by violation of the right of hearing

1. Beginning thus with the assessment of formal defects, we shall follow the order indicated by the claimant, first assessing the alleged omission of an essential formality, by violation of the right of hearing.

2. As stated in the established factual matter, embodied in the documentary analysis contained in the AP and documents attached to the arbitral request, it is verified that the TA rendered its final decision to proceed with the announced corrections, even before the deadline had elapsed that it had set, by notification that it sent to the claimant, so that it would make pronouncements in the prior hearing stage. That is, this first decision was rendered without effective hearing of the claimant. The TA acted wrongly in proceeding this way, violating the established procedural rules and disregarding, with a certain arrogance, the claimant's right of hearing and the opportunity for it to possibly attach further documentation, perhaps more clarifying, to overcome the administration's doubts. This was precisely what occurred, that is, the claimant sent its pronouncement and respective documents on the last day of the deadline (but within the deadline) and on that same day the TA had already made the final decision.

3. However, despite having conducted the procedure in an inadequate manner, it does not appear, nevertheless, that we are faced with an authentic violation of the right of hearing, given what subsequently occurred. After receiving the claimant's response in the prior hearing stage, aware of the error committed, the TA came to correct this error by converting the response in the prior hearing stage into an Administrative Complaint, within the scope of which it notified the claimant to make pronouncements in the hearing stage and, finally, decided to maintain the corrections unchanged, as well as the assessment. It is obvious that the procedure did not proceed in a regular manner.

4. Already within the scope of this arbitral proceeding, it came to invoke the principle of benefit of the act, to understand that in this way the claimant was provided the opportunity to make pronouncements. It is undeniable that it had this opportunity and it is equally certain that this opportunity was only granted in the interest of the administration itself, to attempt to benefit from the assessment procedure. Mere formality without any relevance, since the TA maintained the previous decision without even appreciating the documentary elements and the arguments alleged by the claimant in its hearing. It is certain that the decision now impugned makes express reference to prior hearing and maintains the decision previously notified by considering that the declared elements were not proven. For this reason, in the understanding of this tribunal this omission of an essential formality should be considered as overcome although, it should be noted, it is considered that the TA acted wrongly in conducting the procedure in this manner.

5. Furthermore, on this matter, our superior courts have ruled considering that the violation of the prior hearing right in tax matters is capable of generating annulment of the act and that the rights of administrative complaint and/or challenge of the act cannot put this requirement in question. It is thus a right that is cumulative with the right to challenge injurious acts, so that the fact of this existing does not rule out that procedural defect. But in all the judgments reviewed that in some manner address this question, there was a violation of the hearing right without the administration subsequently taking any steps to correct the error and resume the hearing of the interested party, as occurred in the case under review.

As stated in the decision rendered by TCAS, of 23-10-2012, in proceeding no. 05791/12, given the absolute lack of notification of the interested party to exercise its right, and the proven violation of the hearing right, "the principle of benefit of the administrative act does not have its own legal expression in our legal order, but has been accepted by doctrine and case law, for reasons of procedural economy, thereby constituting one of the dimensions of the efficiency indispensable to the realization of the public interest. It is thus a matter of acknowledging the power of the Court not to annul an invalid act when it is certain that the administrative decision could not be otherwise, since in execution of the restorative effect of the judgment there is no "legally valid alternative" other than to renew the invalid act, although without the defect that determined its annulment. In the domain of acts carried out in the exercise of bound powers (as is the tax act par excellence, the assessment) the Judge shall only be able to apply the principle of benefit of administrative acts when it is possible to conclude, without room for doubt, that the act in question could not have any other decision content. In these cases, the referred principle of benefit of the act can only be applied when faced with a situation of evident legal solution and in which there is no possibility of the omitted prior hearing of the taxpayer, before the assessment act, being able to influence its content."

1. In the case of the present proceedings, the respondent TA came, subsequently, to "correct" the error by converting the claimant's pronouncement into an administrative complaint so as to issue a second decision, exactly equal to the first, but now after having given a new opportunity for prior hearing. In truth, the respondent acted wrongly, but it appears that there shall not be a violation of the right of hearing. It shall be said that the procedure that preceded the assessment did not run in total conformity with the law, it proceeded irregularly, there was haste in the decision, for not waiting for the prior hearing deadline of the taxpayer to expire. However, subsequently, the Administration, by converting the response into administrative complaint proceedings, took care, at least formally, to consider the response presented in the prior hearing stage. It is certain that the entire procedure described reveals a certain predisposition for the non-acceptance of the declared expenses and to maintain the previous decision, which had already been notified, but it cannot be said that there was an absolute violation of the right of hearing. The TA corrected the error by converting the response (and respective attached documents) into administrative complaint proceedings, benefited from what was previously processed, rendered a decision in which it expressly mentions that "from the analysis carried out on the documents/submissions presented in the prior hearing stage, regarding the notification of the divergence(s) identified in the Form 3 income declaration for the year 2014 with identification .../99, the declared elements were not proven, therefore my decision of 2015-12-29 was determined to effect the following corrections: (...)"

Given this, there is no absolute violation of the right of hearing. It shall now be important to know whether this decision contains sufficient substantiation for the assessment act processed and here impugned.

B) Regarding the alleged defect of lack of substantiation:

1. The claimant argues that, from the tenor of the final decision communicated to it, it is evident that the assessment act suffers from absolute lack of substantiation, since it should, at minimum, justify the corrections made, based on the law in force, giving its interpretation of the same, which it did not do. By virtue of no reference having been made to the factual and legal presuppositions on which the TA's decision was based, which disregarded the documentary evidence presented by the claimant in the prior hearing stage, since it decided and issued the additional assessment even before receiving the response sent in exercise of the hearing right, and it is certain that even after converting the hearing into administrative complaint proceedings, it says nothing concrete regarding the facts invoked and documentally proven by the claimant, limiting itself to notifying it that it maintains the decision to proceed with the corrections previously announced due to lack of proof of the declared elements. Despite all the additional documents submitted by the claimant, the truth is that no assessment was made of them, which leads to the conclusion that the decision was made in any case and regardless of what the taxpayer would submit to the case. The claimant concludes that the provisions contained in articles 77 and 99, section c) of the LGT were violated.

The respondent, in turn, argues that there is no formal defect due to lack of substantiation, since from what is alleged in the arbitral request it results that the claimant understood perfectly the cognitive process that led the respondent to decide as it decided. So much so that the claimant demonstrated, throughout the arbitral pronouncement request, to have fully understood the factual and legal framework on which the Respondent's decision was based, since it attempted therein to refute the entire TA's performance.

It results from the above that in the concrete case it is now necessary to determine whether the impugned act suffers from the defect of lack of substantiation, since this depends on knowing whether or not the factual and legal requirements that led the TA to the impugned assessment are fulfilled. There is thus a logical dependency in the assessment of the formal and substantive issues placed before the Tribunal, necessarily interlinked, since the illegality pointed to the impugned tax acts, as alleged in the arbitral request, results from error regarding the legal presuppositions, by virtue of erroneous interpretation of the provision of article 41 of the IRS Code, the assessment of this substantive defect depends on the prior determination of the substantiating basis of the act.

1. It is clear that substantiation is a legal requirement that is imposed for any administrative or tax act, the assessment being a type of tax act in relation to which this requirement is imposed with maximum rigor, given the effects it produces in the legal sphere of the taxpayer. Furthermore, it should be recalled that it is a constitutional imposition by virtue of the provision of article 268, no. 3, of the Constitution of the Portuguese Republic (CRP), reaffirmed in article 77 of the General Tax Law (LGT). From this latter provision results, indeed, that although the duty of substantiation is not restricted only to acts unfavorable to the taxpayer, in relation to these a greater density is required. It is today clear in national doctrine and case law, including arbitral, that the substantiation legally required must have the following characteristics:

a. Sua sponte: it must always originate from the administration's initiative, substantiations on request not being admissible;

b. Contemporaneity: it must be contemporary with the performance of the act, substantiations being unable to be deferred or on request;

c. Clarity: it must be understandable by an average recipient, avoiding polysemous or deeply technical concepts;

d. Completeness: it must contain all the essential elements that were determinative of the decision taken, this characteristic unfolding in the duty of justification (legal norms and factuality – domain of legality) and in the duty of motivation (domain of discretion or opportunity, when an assessment is required).

1. The duty of substantiation aims to allow the interested parties to know the reasons that led the administrative or tax authority to act or decide, so as to convince its recipient of the legality that underlies it, allowing it to understand its rationale and be able, consciously, to assess its acceptance or challenge. This has been repeatedly affirmed by the case law of the superior courts, reiterating that the substantiation must provide the recipient of the act with the reconstruction of the cognitive and evaluative process traveled by the entity that performed the act, so as to clearly reveal the reasons that led it to that concrete decision. It has also been recognized by doctrine and case law that this requirement of substantiation should be balanced and moderate, being considered fulfilled by the succinct and clear exposition of the factual and legal grounds that motivated the decision, and may consist of a declaration of agreement with the grounds of previous opinions, information or proposals (substantiation per relationem or per remissionem), provided that these are integrated in the final decision, properly notified to the recipient. Non-compliance with this requirement (absolute lack of substantiation) or the stated requirements (incongruent, confused or contradictory substantiation, incomplete, obscure or merely remissive) constitutes illegality, capable of leading to annulment of the act.

Also in the sphere of internal inspection or inspection procedures conducted by the TA, article 63, no. 1, of RCPIT also provides that the tax acts or in tax matters that result from the report may be substantiated in its conclusions, through adhesion or agreement with these, the competent entity in all cases being required to substantiate its disagreement with the conclusions of the report. The importance of factual and legal motivation contained in the tax inspection procedure is of fundamental importance, given that this process will subsequently influence the tax decision. This is the reason for the requirement of the inspection procedure and the guarantees provided therein, among which stands out the exercise of the right of hearing, which should precede the making of the final decision of the procedure.

1. Let us return to the concrete case, given that the required substantiation always relates to a concrete tax act and must be that which functionally proves necessary and adequate so that a normal taxpayer, with common knowledge and normally diligent, understands the sense of it (although may disagree with its sense) and perceives that it is not faced with a pure demonstration of arbitrariness. It is thus necessary to assess whether in the case of the present proceedings, the Administration made known the reasons that led it to disregard the expenses presented and declared by the taxpayer in its IRS declaration relating to the year 2014 and if, in the case, the reasons on which the issued assessment was based are understood.

2. Upon examination of the case file, it is verified that the final decision that determined the corrections and, consequently, the impugned assessment has the following content: "from the analysis carried out on the documents/submissions presented in the prior hearing stage, regarding the notification of the divergence(s) in the Form 3 income declaration for the year 2014 with identification .../99, the declared elements were not proven, therefore by my decision of 2015-12-29 the following corrections were determined to be effected:

[THIS IS TABLE:
Annex | Section | Field | Declared Value | Value to Correct | Final Value
F | 04 | 402 | €691.04 | €500.00 | 191.04
F | 04 | 408 | €41,086.68 | €40,985.27 | 101.41
]

This is all the substantiation contained in the notification, after the response of the taxpayer in the prior hearing stage was allegedly considered.

Will this substantiation be sufficient?

1. It is understood that the substantiation is insufficient, which is equivalent to lack of substantiation, if its content is not sufficient to explain the reasons why the decision was made. In other words, the substantiation must be sufficient, and is only so if from the decision it is possible to understand which facts and legal norms explain and support the final decision. The factual reasons and legal grounds of the decision must be perceptible, clear and understandable in light of the legal provisions mentioned and/or the principles invoked. The understanding of the STA regarding legal substantiation has been that it is considered sufficient with the reference to the concrete applicable legal provisions, the relevant principles, the legal regime or the well-determined legal framework. Even admitting, exceptionally and in very atypical cases (hardly compatible with the nature of the tax legal obligation of strictly legal origin), that the applicable legal provisions are not mentioned in the substantiation of the act, it shall always be necessary to indicate the legal framework that led to the act or decision, and this must be perfectly cognoscible from the perspective of a normal recipient, so that the legal reasons that determined it are perfectly intelligible.

2. Now, in the concrete case, being an official assessment issued after the corrections made, which disregarded a set of specific deductions of category F, with direct impact on the determination of the net income of this category and, consequently, on taxable income, it is not understood nor can be accepted as sufficient substantiation the laconic conclusion according to which "the declared elements were not proven...". There is not a single legal norm mentioned, a principle or interpretation drawn from the law that supports such conclusion. Furthermore, from the documentation attached to the case in annex to the arbitral request, as well as from the administrative process filed by the TA, it is possible to conclude that vast documentation supporting the specific deductions made by the taxpayer in category F was attached. Thus, the TA should undoubtedly substantiate specifically, clearly and unequivocally why this documentation was not sufficient, or could not be accepted or what the legal reasons were that did not allow the taxpayer to deduct such expenses, which it supported (which is not questioned by the TA) and whose expectation would be to deduct for the determination of taxable income for IRS purposes. The TA could even have had good reasons to conclude in this manner, but it was required to evidence them, concretely, clearly and sufficiently, so that we would understand the factual and legal reasons that led it to the concrete decision.

3. In light of the elements filed with the case, such substantiation is clearly insufficient, coming close to a situation that we may designate as absolute lack of substantiation. However, as we have already made clear throughout the preceding exposition, insufficient substantiation is equivalent to lack of substantiation for all legal purposes. Furthermore on this matter, it should be said that, even if different understanding were to be had regarding the alleged defect of lack of substantiation, we would still be faced with a situation of violation of law, by absence of demonstration of the factual and legal presuppositions underlying the act performed, embodied in the corrections made and in the issuance of the additional IRS assessment here impugned.

4. Furthermore, the TA's allegation to set aside the defect of lack of substantiation does not hold. For it cannot come to say that the fact that in its arbitral request the claimant revealed knowing or reaching the reasons that determined the impugned assessment, under penalty of subverting the entire legal and constitutional binding framework in force. The recipient cannot substitute itself for the author of the act, nor can the exercise of its guarantees of challenge prejudice it. Substantiation is a requirement of the act itself, incumbent upon its author to comply with the law and the functional obligations to which it is bound, including the obligation to substantiate it, factually and legally, clearly and sufficiently.

5. And there is no doubt whatsoever that the recipient has the right to know which legal framework was taken into consideration, under which legal regime the author of the act understood performing it, which legal norms and which interpretation led it to conclude as it concluded, that is, that "the declared elements were not proven." Despite all the documentation submitted by the claimant, reinforced with that which it submitted in the prior hearing stage (which the respondent converted into an administrative complaint), the respondent concludes that the declared elements (the expenses) are not found to be proven. The question is why?

The respondent, in its response, does not question the duty of substantiating the corrections, nor could it be otherwise, but everything that may now be said is totally outside the content of the act and even demonstrates, with considerable evidence, the absence of substantiation of the impugned assessment. The tax administration is bound by the law, being unable to act except in cases where it permits, nor in a manner different from what it imposes, therefore substantiation is essential so that the factual and legal reasons underlying the act performed are understood. Being a matter of a set of expenses with leased properties, which constitute specific deductions of category F, it is not enough to say that they are not found to be proven. It was necessary that the documentation attached be critically analyzed and the recipient of the act be properly informed about which was the factual situation considered, which law was interpreted and applied. For this very reason, it is also not sufficient merely to indicate a legal norm (which in the case did not even occur), adding that the factual situation does not fall within its scope. Even this type of substantiation is considered incomplete, since it is a conclusion not preceded by a consequent and logical explanation that supports it. Even after analyzing the documentation delivered in the prior hearing stage (converted into an administrative complaint), nothing was said concretely about the documentary elements newly submitted with that pronouncement. It was not demonstrated that, in light of the reference norms (which it does not even indicate), the elements submitted by the claimant were not sufficient or adequate to support the deductions of these expenses. And it should not be said that previously it had notified more enlightened reasons underlying, since this is not extracted from the documentary elements filed with the case, and in any case, the required substantiation would always have to be inserted in the final act to be notified to the taxpayer. It should be borne in mind that this notification occurred after a relevant change in circumstances, given that the TA had already notified the final decision previously, without even waiting for the deadline for the claimant to exercise its right of hearing to expire, and well knowing that this resulted in a procedurally invalidating formal defect, it then decided to convert the response filed into an administrative complaint. It is certain that, curiously, the determination or decision of the TA was taken, irremediably and independently of whatever the claimant would come to argue or the documents attached to prove the expenses. It is absolutely evidenced, by the hasty manner that led to the final decision, without respect for the deadline set for prior hearing. It is evident that the TA's purpose with the initiative of converting the response in the prior hearing into an administrative complaint was solely to correct the formal defect by omission of an essential formality. It made no critical analysis of the documents delivered by the taxpayer.

1. What matters, without a shadow of doubt, is that the substantiation contained in the decision that led to the impugned assessment does not appear to be sufficient to satisfy the obligation of substantiating, and it is certain that the applicable legal regime that is provided for in article 41 of the IRS Code requires interpretative effort, incumbent upon the TA to reveal the parameters that guided it in its application. In the case of the present proceedings this revelation was not carried out, nor was it even touched upon, being non-existent, or at least insufficient the substantiation of the act. The claimant was left without knowing which the concrete substantiation of its factual and legal situation was, therefore was obliged to contest what it supposed was the motivation of the act. Indeed, the simple mention that some expenses presented by the claimant "were not proven" constitutes a conclusive discourse and not a substantiating one, which does not allow making known to an average taxpayer with normal understanding capacity the reasons justifying the corrections and the impugned assessment. It shall not be said that due to the fact that the claimant throughout the arbitral pronouncement request did not limit itself to invoking the lack of substantiation of the tax acts and invoked violation of law, developing a certain understanding regarding the expenses it presented and on the interpretation that it considers correct of the applicable legal norms, that with this it demonstrated having perfect knowledge of the substantiation of the impugned assessment. All that it invokes is, indeed, a set of arguments to demonstrate that the expenses should have been considered deductible.

2. For all that is stated above, it is concluded that the impugned assessment suffers from the defect of lack of substantiation, and therefore is illegal and must be annulled.

3. Given what has been decided regarding the alleged formal defect of lack of substantiation, the assessment of the defect of violation of law that the Claimant invokes is prejudiced, although it is manifest that suffering the act from lack of substantiation, the factual nor the legal presuppositions in which it was anchored are evidenced.

C - Regarding the request for indemnification for the cost of guarantee provision by voluntary mortgage

1. The claimant further files a request for indemnification for undue guarantee, for the cost incurred with the provision of guarantee through constitution of a voluntary mortgage, in the amount of €700.00. The TA argues for the dismissal of this request, but does not contest the amount indicated by the claimant as costs of guarantee provision. However, as results from the established factual matter (see section p) - Established Facts), the Claimant only attached to the case documentary proof attesting payment of the amount of €225.00 (see Doc. no. 1, attached to the arbitral request) as cost for the constitution of a unilateral voluntary mortgage for guarantee and suspension of the executive effects of the impugned assessment.

2. In accordance with the provision of no. 1 of article 53 of the LGT, the debtor who, to suspend execution, offers a bank guarantee or equivalent shall be indemnified wholly or partially for the damages resulting from its provision, in case it has maintained it for a period exceeding three years in proportion of the final ruling in administrative remedy, challenge or opposition to execution that have as their object the guaranteed debt. Article 2 of this same article adds that the period referred to in no. 1 does not apply if it is concluded that there was error attributable to the services. Provides, in turn, no. 1 of article 171 of CPPT, that the indemnification in case of bank guarantee or equivalent improperly provided envisaged in the referred provision shall be requested in the proceeding in which the legality of the exequible debt is controversial, and should in the same be requested, in accordance with no. 2 of the same provision, if the ground is supervening, within 30 days after its occurrence.

3. Being procedure for the request for annulment of the impugned tax act, to which the guaranteed debt relates, and verification being made that it was provided as a result of error attributable to the services, the request for indemnification for the provision of the respective guarantee shall equally proceed, fixing the quantum of the same, observed no. 3 of article 53 of the LGT, in the amount of €225.00, comprovedly paid for the constitution of the guarantee, as per the documentary proof filed with the case. (See Doc. no. 1 attached to the arbitral request)

V. DECISION

In the terms stated above, this Arbitral Tribunal decides:

a) To find procedent the arbitral pronouncement request and to declare the illegality of the impugned assessment, due to formal defect of lack of substantiation;

b) To declare the annulment of the impugned act with the legal consequences;

c) To find partially procedent the request for indemnification for the cost of undue guarantee provision, which is fixed at €225.00 and to condemn the Respondent to pay this amount;

d) To condemn the parties to payment of the costs of the proceedings in proportion to default, that is, 3% for the Claimant and 97% for the Tax and Customs Authority.

VALUE OF THE CASE

The value of the case is fixed at €15,926.35 in accordance with article 97-A, no. 1, a), of CPPT, applicable by virtue of sections a) and b) of no. 1 of article 29 of RJAT and no. 2 of article 3 of the Regulations on Costs in Tax Arbitration Proceedings.

COSTS

The value of the arbitration fee is fixed at €918.00, in accordance with Table I of the Regulations on Costs in Tax Arbitration Proceedings, for the losing party, in accordance with articles 12, no. 2, and 22, no. 4, both of RJAT, and article 4, no. 4, of the cited Regulations.

Let it be notified.

Lisbon, 29 December 2017

The Arbitral Tribunal,

(Maria do Rosário Anjos)

CAAD: Tax Arbitration
Case no.: 336/2016-T
Subject: IRS – Deduction of Expenses Category F; article 41 CIRS; Defects of form and violation of law.

• Replaced by the decision of 29-12-2017

Claimant: A...
Respondent: Tax and Customs Authority

ARBITRAL DECISION

I – REPORT

A) The Parties and the Constitution of the Arbitral Tribunal

1. A..., taxpayer no. ..., with tax domicile at Avenue ... no. ..., ..., ...-..., Lisbon (hereinafter designated as "Claimant"), requested the constitution of a collective Arbitral Tribunal, under the terms of article 2, no. 1, section a) and 10, nos. 1 and 2 of Decree-Law no. 10/2011, of 20 January, hereinafter designated as "RJAT" and of Ordinance no. 112 – A/2011, of 22 March, for the challenge and declaration of illegality of the additional IRS assessment relating to the year 2014, with no. 2016..., issued on 06-02-2016, in the amount of €17,291.63, with an outstanding debt balance of €15,296.35 and payment deadline until 06-04-2016, seeking its annulment.

2. The request for constitution of the Arbitral Tribunal was filed by the Claimant on 22-06-2016, was accepted by the Honourable President of CAAD on 23-06-2016 and immediately notified to the Tax and Customs Authority. The Claimant chose not to appoint an arbitrator, therefore, under the terms of no. 1, of article 6 of RJAT, the undersigned was appointed by the Deontological Board of the Center for Administrative Arbitration, on 25-08-2016, as arbitrator for the constitution of a single Arbitral Tribunal. Thus, in accordance with the provision of section c), of no. 1, of article 11, of RJAT, with the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the Arbitral Tribunal was constituted on 12-09-2016.

On 14-09-2016 an arbitral order was rendered, for the Tax and Customs Authority (TA) to submit its response within the legal deadline, in the terms and for the purposes of nos. 1 and 2 of article 17 of RJAT.

1. On 13-10-2016 the Respondent filed the Administrative Process (AP) with the case and on 17-10-2016 its response, which are hereby deemed fully reproduced. In its response, the Respondent invokes the exception of untimeliness of the arbitral request, the incompetence of the Tribunal and, merely as a precaution, contests the arguments of the Claimant. Finally, it considers that the issues under discussion are exclusively matters of law and, for this reason, requests the waiver of the holding of the meeting referred to in article 18 of RJAT.

2. On 26-10-2016 an arbitral order was rendered waiving the holding of the meeting provided for in article 18 of RJAT, since upon examination of the arbitral pronouncement request submitted by the Claimant, properly documented, the Response and the AP filed with the case by the TA, it is verified that the documentary evidence filed with the case is sufficient for the decision to be rendered. The issues to be decided, considering the position of the parties intervening in the proceedings, embodied in their respective pleadings filed with the case, are exclusively matters of law. Furthermore, in the response presented, the TA expressly requested waiver of holding the meeting referred to in article 18 of RJAT. Accordingly, the holding of the meeting provided for in article 18 of RJAT was waived and a deadline, equal and successive, of 10 days was set for the submission of optional written submissions, with the proceedings then continuing to final decision to be rendered by 20 December 2016. On this date, a new arbitral order was rendered extending the deadline by a further 15 days, as it was not possible to complete the arbitral decision within the initially set deadline.

The parties were invited to send their respective procedural documents to the case in Word format and the Claimant was notified to make payment of the subsequent arbitration fee by 10 days before the date set for final decision.

The parties submitted no submissions.

B) THE REQUEST FILED BY THE CLAIMANT:

1. The Claimant files the present arbitral pronouncement request, seeking the declaration of illegality of the additional IRS assessment relating to the year 2014, invoking the following grounds:

a) Defect of form, due to omission of an essential formality of hearing of the Claimant, since, the Claimant alleges, the assessment (final act) was issued even before the deadline had elapsed for the taxpayer to exercise its right of hearing, which means that the principle of prior hearing, provided for in the law, was not respected;

b) Defect of form due to lack of substantiation, since the TA proceeded to the additional assessment without indicating minimum substantiation for the corrections it made;

c) Defect of violation of law by material violation of the provisions of articles 41 and 55 of CIRS, given that the disregard of the expenses presented by the Claimant, relating to works carried out on the leased properties, constitutes a clear violation of the provisions of these legal provisions.

Therefore, it concludes for the illegality of the impugned assessment, requesting its annulment, with the legal consequences, and further, the reimbursement of the costs incurred with the voluntary mortgage to suspend the tax enforcement proceedings, which it fixed at €700.00.

C – THE RESPONSE OF THE RESPONDENT

1. In its response the TA comes to argue for the legality of the assessment and the dismissal of the request.

It argues in summary, regarding the defect of form, that although the assessment was issued before receiving the Claimant's pronouncement in the prior hearing stage, the truth is that facing this situation the services did not disregard the arguments of the taxpayer, as they converted the response into an administrative complaint, as shown in the AP. Thus, within the scope of the administrative complaint proceedings they repeated the notification for prior hearing of the taxpayer, and the latter chose not to make any pronouncement.

As for the defect of substantiation, it argues that, as results from the entire statement of reasons supporting the arbitral request filed, the Claimant understood very well what the reasons for the corrections were. It invokes some doctrine and case law to conclude that the assessment act is properly substantiated.

Finally, regarding the defect of violation of law, it also understands that this does not occur, given that the corrections made relate to expenses that are not, in the TA's understanding, properly documented and that cannot be considered as relevant or deductible in light of the provisions of article 41 of CIRS. Thus, with all the argumentation it develops throughout the final part of its response, and which is hereby deemed fully reproduced, the Respondent concludes that the corrections made are appropriate and correspond to the correct interpretation of the law.

1. The Claimant and the Respondent thus disagree regarding the issues outlined, which are exclusively matters of law and on which it is necessary to decide.

II - PROCEDURAL REQUIREMENTS

1. The Arbitral Tribunal is regularly constituted.

2. The Parties enjoy legal personality and capacity, are legitimate and are legally represented (see articles 4 and 10 no. 2 of RJAT and article 1 of Ordinance no. 112/2011, of 22 March).

3. The proceedings do not suffer from defects that would invalidate them.

III – Factual Matter

A) Established Facts

1. As material factual matter, this tribunal finds established the following facts:

• The claimant submitted its IRS declaration relating to the year 2014, on 31-05-2015, through submission via the ATA website;

• Accordingly, an IRS tax assessment was issued, with the amount payable of 631.77, which the claimant paid;

• On 07-07-2015 the claimant was notified of the need to provide evidence of the elements contained in the IRS declaration, relating to the year 2014, namely the expenses with leased properties;

• On 03-08-2015 the claimant, by registered letter, sent a detailed explanation of the expense values presented and the reasons that determined such expenses, including some improvement works on inherited properties in poor state of conservation, so as to allow their leasing;

• The claimant explained the rationale for each of the expenses presented and attached nine documents;

• It further attached a substitute declaration, with a correction that it assumed as being due;

• On 06-08-2015, an additional IRS assessment was processed, by virtue of the substitute declaration delivered by the taxpayer, in the amount of €1,365.28, which was paid in full;

• On 09-12-2015 the claimant was notified by registered mail, to exercise its right of prior hearing within 15 days on the draft decision for correction of the values entered in Form 3, annex F;

• The corrections to be made were as follows:

[THIS IS TABLE:
Annex | Section | Field | Declared Value | Value to Correct | Final Value
F | 04 | 402 | €691.04 | €500.00 | 191.04
F | 04 | 408 | €41,086.68 | €40,985.27 | 101.41
]

• On 29-12-2015, on the last day of the set deadline, the claimant sent its response in the prior hearing stage, by registered mail and attached three further documents;

• On the same date, that is, on 29-12-2015, the notification of the final decision to proceed with the corrections made was issued and sent to the claimant;

• The TA converted the claimant's pronouncement, in the prior hearing stage, into administrative complaint proceedings, within the scope of which it notified the claimant to exercise its right of hearing;

• The TA maintained the initially announced corrections, on the grounds that, even after the elements submitted by the claimant in the prior hearing stage, "the declared elements were not proven";

• It maintained the initially announced corrections contained in the table referenced above in item i);

• On 06-02-2016 the additional IRS assessment was issued, with no. 2016..., for the amount of €17,291.63, with an outstanding debt balance of €15,926.35 and payment deadline until 06-04-2016;

p. The Claimant constituted a unilateral voluntary mortgage to suspend the tax enforcement proceedings, having incurred a cost of €700.00;

q. The present arbitral request, for annulment of the tax assessments, was filed on 22-06-2016.

B) FACTS NOT ESTABLISHED

1. With relevance to the decision, there are no facts that should be considered as not established.

C) SUBSTANTIATION OF THE ESTABLISHED FACTS

1. The facts described above were established based on the documentary evidence that the parties presented to this proceeding, the Claimant together with the arbitral request filed and the Respondent with the filing of its administrative process. It should be noted that, regarding the factual matter, the Tribunal does not have to rule on everything that was alleged by the parties, its duty being, instead, to select the facts that matter for the decision and to distinguish the established matter from the unestablished, as provided in article 123, no. 2, of CPPT and in article 607, no. 3 of the Code of Civil Procedure (CPC), applicable ex vi article 29, no. 1, sections a) and e), of RJAT. In this manner, the facts relevant to the adjudication of the case are selected and defined according to their legal relevance, which is established in view of the various plausible solutions of the legal issue(s) (see article 596, applicable ex vi article 29, no. 1, section e), of RJAT). Taking into consideration the positions assumed by the parties, the documentary evidence and the AP filed with the case, it was considered established, with relevance to the decision, the facts listed above, which are moreover consensually recognized and accepted by the parties.

IV – ON THE LAW

1. With the factual matter established as stated above, it is necessary to address the legal issues raised by the parties, beginning necessarily with the formal defects invoked by the Claimant.

Article 124 of CPPT, applicable ex vi article 29, no. 1, section a), of RJAT, provides as follows:

"1. In the judgment, the court shall assess prioritarily the defects that lead to the declaration of non-existence or nullity of the impugned act and, thereafter, the defects argued that lead to its annulment.

In the aforementioned groups the assessment of the defects is made in the following order:

a) In the first group, those defects whose procedence determines, according to the judicious discretion of the adjudicator, more stable or effective protection of the injured interests;

b) In the second group, that indicated by the appellant, whenever the latter establishes a relationship of subsidiarity among them and no other defects are argued by the Public Prosecutor or, in all other cases, that fixed in the preceding section."

1. This legal provision establishes a priority for the assessment of the defects of the impugned act. Thus, the defects whose procedence determines, according to the judicious discretion of the adjudicator, more stable or effective protection of the injured interests, should first be assessed, which leads us to question the understanding to be given to this criterion. According to case law of the Supreme Administrative Court (STA), this principle would lead to giving priority to the assessment of substantive defects of the act over formal defects, since the latter do not prevent the renewal of the act, and it is certain that this appears to be the understanding that privileges more effective protection of the injured interests.

2. Expressly citing some case law of the STA, which synthesizes the understanding of this superior Court, it results, among others, from the judgment rendered on 17.11.2010, the following: "(…) the case law of this Supreme Court has repeatedly explained, within the scope of the interpretation of the normative content of the analogous rule contained in article 57 of LPTA, that although the more effective protection of the interests of the appellant imposes, in principle, the priority assessment of substantive or fundamental defects in relation to formal defects, particularly the defect of lack of substantiation (given that the verification of this does not prevent the renewal of the act with equal legal configuration, naturally expunged of the defect that led to its annulment)."

However, it also results from this case law of the STA, reaffirmed in many other Judgments, that this rule is not absolute, since it may happen that, for example, only the substantiation of the act may reveal substantive defects through the clarification of the factual and legal framework in which the impugned act was based. Which means that, invoked the defect of lack of substantiation, in the case that this is effectively verified, the Court may not be in a position to proceed with the assessment of the substantive defects, for not having all the available and essential elements to do so. The precedence of the formal defect can be justified when the inquiry into the concrete motivation of the act proves indispensable to the control of the substantive (fundamental) defects of the act.

It is thus concluded that the more effective protection of the interests of the appellant may pass through the priority assessment of formal defects, specifically the defect of lack of substantiation, whenever the discovery of the motivation of the act may offer elements necessary to the judgment of verification of the substantive defects, which occurs whenever there is an absolute lack of substantiation (of fact and/or law), thereby implying the impossibility of knowledge of the facts on which the act was based and/or its legal framework, making impossible the jurisdictional control of the substantive defects.

In other words, the priority assessment of the formal defect shall cease to be required, whenever the alleged lack or insufficiency of substantiation proves, in the concrete case (and the assessment must obviously be case-specific) irrelevant for the assessment and eventual procedence of the substantive defect or defects that have been concretely alleged.

1. In the concrete case of the present proceedings, it is concluded that none of the defects invoked by the claimant is capable of generating nullity of the act. As for the invoked defects of violation of the right of hearing and lack of substantiation, regardless of whether they are capable of generating annulment of the act, following the case law cited above, we are confronted with the question of whether maximum effectiveness in protecting the interests of the claimant would impose, in principle, the priority assessment of the defect of violation of law in relation to the formal defect of lack of substantiation. However, in the case under review, the assessment of the formal defects, particularly the defect of lack of substantiation, is necessarily imposed as prior to the assessment of the alleged violation of law, as shall be demonstrated.

A) Regarding the alleged omission of an essential formality by violation of the right of hearing

1. Beginning thus with the assessment of formal defects, we shall follow the order indicated by the claimant, first assessing the alleged omission of an essential formality, by violation of the right of hearing.

2. As stated in the established factual matter, embodied in the documentary analysis contained in the AP and documents attached to the arbitral request, it is verified that the TA rendered its final decision to proceed with the announced corrections, even before the deadline had elapsed that it had set, by notification that it sent to the claimant, so that it would make pronouncements in the prior hearing stage. That is, this first decision was rendered without effective hearing of the claimant. The TA acted wrongly in proceeding this way, violating the established procedural rules and disregarding, with a certain arrogance, the claimant's right of hearing and the opportunity for it to possibly attach further documentation, perhaps more clarifying, to overcome the administration's doubts. This was precisely what occurred, that is, the claimant sent its pronouncement and respective documents on the last day of the deadline (but within the deadline) and on that same day the TA had already made the final decision.

3. However, despite having conducted the procedure in an inadequate manner, it does not appear, nevertheless, that we are faced with an authentic violation of the right of hearing, given what subsequently occurred. After receiving the claimant's response in the prior hearing stage, aware of the error committed, the TA came to correct this error by converting the response in the prior hearing stage into an Administrative Complaint, within the scope of which it notified the claimant to make pronouncements in the hearing stage and, finally, decided to maintain the corrections unchanged, as well as the assessment. It is obvious that the procedure did not proceed in a regular manner.

4. Already within the scope of this arbitral proceeding, it came to invoke the principle of benefit of the act, to understand that in this way the claimant was provided the opportunity to make pronouncements. It is undeniable that it had this opportunity and it is equally certain that this opportunity was only granted in the interest of the administration itself, to attempt to benefit from the assessment procedure. Mere formality without any relevance, since the TA maintained the previous decision without even appreciating the documentary elements and the arguments alleged by the claimant in its hearing. It is certain that the decision now impugned makes express reference to prior hearing and maintains the decision previously notified by considering that the declared elements were not proven. For this reason, in the understanding of this tribunal this omission of an essential formality should be considered as overcome although, it should be noted, it is considered that the TA acted wrongly in conducting the procedure in this manner.

5. Furthermore, on this matter, our superior courts have ruled considering that the violation of the prior hearing right in tax matters is capable of generating annulment of the act and that the rights of administrative complaint and/or challenge of the act cannot put this requirement in question. It is thus a right that is cumulative with the right to challenge injurious acts, so that the fact of this existing does not rule out that procedural defect. But in all the judgments reviewed that in some manner address this question, there was a violation of the hearing right without the administration subsequently taking any steps to correct the error and resume the hearing of the interested party, as occurred in the case under review.

As stated in the decision rendered by TCAS, of 23-10-2012, in proceeding no. 05791/12, given the absolute lack of notification of the interested party to exercise its right, and the proven violation of the hearing right, "the principle of benefit of the administrative act does not have its own legal expression in our legal order, but has been accepted by doctrine and case law, for reasons of procedural economy, thereby constituting one of the dimensions of the efficiency indispensable to the realization of the public interest. It is thus a matter of acknowledging the power of the Court not to annul an invalid act when it is certain that the administrative decision could not be otherwise, since in execution of the restorative effect of the judgment there is no "legally valid alternative" other than to renew the invalid act, although without the defect that determined its annulment. In the domain of acts carried out in the exercise of bound powers (as is the tax act par excellence, the assessment) the Judge shall only be able to apply the principle of benefit of administrative acts when it is possible to conclude, without room for doubt, that the act in question could not have any other decision content. In these cases, the referred principle of benefit of the act can only be applied when faced with a situation of evident legal solution and in which there is no possibility of the omitted prior hearing of the taxpayer, before the assessment act, being able to influence its content."

1. In the case of the present proceedings, the respondent TA came, subsequently, to "correct" the error by converting the claimant's pronouncement into an administrative complaint so as to issue a second decision, exactly equal to the first, but now after having given a new opportunity for prior hearing. In truth, the respondent acted wrongly, but it appears that there shall not be a violation of the right of hearing. It shall be said that the procedure that preceded the assessment did not run in total conformity with the law, it proceeded irregularly, there was haste in the decision, for not waiting for the prior hearing deadline of the taxpayer to expire. However, subsequently, the Administration, by converting the response into administrative complaint proceedings, took care, at least formally, to consider the response presented in the prior hearing stage. It is certain that the entire procedure described reveals a certain predisposition for the non-acceptance of the declared expenses and to maintain the previous decision, which had already been notified, but it cannot be said that there was an absolute violation of the right of hearing. The TA corrected the error by converting the response (and respective attached documents) into administrative complaint proceedings, benefited from what was previously processed, rendered a decision in which it expressly mentions that "from the analysis carried out on the documents/submissions presented in the prior hearing stage, regarding the notification of the divergence(s) identified in the Form 3 income declaration for the year 2014 with identification .../99, the declared elements were not proven, therefore my decision of 2015-12-29 was determined to effect the following corrections: (...)"

Given this, there is no absolute violation of the right of hearing. It shall now be important to know whether this decision contains sufficient substantiation for the assessment act processed and here impugned.

B) Regarding the alleged defect of lack of substantiation:

1. The claimant argues that, from the tenor of the final decision communicated to it, it is evident that the assessment act suffers from absolute lack of substantiation, since it should, at minimum, justify the corrections made, based on the law in force, giving its interpretation of the same, which it did not do. By virtue of no reference having been made to the factual and legal presuppositions on which the TA's decision was based, which disregarded the documentary evidence presented by the claimant in the prior hearing stage, since it decided and issued the additional assessment even before receiving the response sent in exercise of the hearing right, and it is certain that even after converting the hearing into administrative complaint proceedings, it says nothing concrete regarding the facts invoked and documentally proven by the claimant, limiting itself to notifying it that it maintains the decision to proceed with the corrections previously announced due to lack of proof of the declared elements. Despite all the additional documents submitted by the claimant, the truth is that no assessment was made of them, which leads to the conclusion that the decision was made in any case and regardless of what the taxpayer would submit to the case. The claimant concludes that the provisions contained in articles 77 and 99, section c) of the LGT were violated.

The respondent, in turn, argues that there is no formal defect due to lack of substantiation, since from what is alleged in the arbitral request it results that the claimant understood perfectly the cognitive process that led the respondent to decide as it decided. So much so that the claimant demonstrated, throughout the arbitral pronouncement request, to have fully understood the factual and legal framework on which the Respondent's decision was based, since it attempted therein to refute the entire TA's performance.

It results from the above that in the concrete case it is now necessary to determine whether the impugned act suffers from the defect of lack of substantiation, since this depends on knowing whether or not the factual and legal requirements that led the TA to the impugned assessment are fulfilled. There is thus a logical dependency in the assessment of the formal and substantive issues placed before the Tribunal, necessarily interlinked, since the illegality pointed to the impugned tax acts, as alleged in the arbitral request, results from error regarding the legal presuppositions, by virtue of erroneous interpretation of the provision of article 41 of the IRS Code, the assessment of this substantive defect depends on the prior determination of the substantiating basis of the act.

1. It is clear that substantiation is a legal requirement that is imposed for any administrative or tax act, the assessment being a type of tax act in relation to which this requirement is imposed with maximum rigor, given the effects it produces in the legal sphere of the taxpayer. Furthermore, it should be recalled that it is a constitutional imposition by virtue of the provision of article 268, no. 3, of the Constitution of the Portuguese Republic (CRP), reaffirmed in article 77 of the General Tax Law (LGT). From this latter provision results, indeed, that although the duty of substantiation is not restricted only to acts unfavorable to the taxpayer, in relation to these a greater density is required. It is today clear in national doctrine and case law, including arbitral, that the substantiation legally required must have the following characteristics:

a. Sua sponte: it must always originate from the administration's initiative, substantiations on request not being admissible;

b. Contemporaneity: it must be contemporary with the performance of the act, substantiations being unable to be deferred or on request;

c. Clarity: it must be understandable by an average recipient, avoiding polysemous or deeply technical concepts;

d. Completeness: it must contain all the essential elements that were determinative of the decision taken, this characteristic unfolding in the duty of justification (legal norms and factuality – domain of legality) and in the duty of motivation (domain of discretion or opportunity, when an assessment is required).

1. The duty of substantiation aims to allow the interested parties to know the reasons that led the administrative or tax authority to act or decide, so as to convince its recipient of the legality that underlies it, allowing it to understand its rationale and be able, consciously, to assess its acceptance or challenge. This has been repeatedly affirmed by the case law of the superior courts, reiterating that the substantiation must provide the recipient of the act with the reconstruction of the cognitive and evaluative process traveled by the entity that performed the act, so as to clearly reveal the reasons that led it to that concrete decision. It has also been recognized by doctrine and case law that this requirement of substantiation should be balanced and moderate, being considered fulfilled by the succinct and clear exposition of the factual and legal grounds that motivated the decision, and may consist of a declaration of agreement with the grounds of previous opinions, information or proposals (substantiation per relationem or per remissionem), provided that these are integrated in the final decision, properly notified to the recipient. Non-compliance with this requirement (absolute lack of substantiation) or the stated requirements (incongruent, confused or contradictory substantiation, incomplete, obscure or merely remissive) constitutes illegality, capable of leading to annulment of the act.

Also in the sphere of internal inspection or inspection procedures conducted by the TA, article 63, no. 1, of RCPIT also provides that the tax acts or in tax matters that result from the report may be substantiated in its conclusions, through adhesion or agreement with these, the competent entity in all cases being required to substantiate its disagreement with the conclusions of the report. The importance of factual and legal motivation contained in the tax inspection procedure is of fundamental importance, given that this process will subsequently influence the tax decision. This is the reason for the requirement of the inspection procedure and the guarantees provided therein, among which stands out the exercise of the right of hearing, which should precede the making of the final decision of the procedure.

1. Let us return to the concrete case, given that the required substantiation always relates to a concrete tax act and must be that which functionally proves necessary and adequate so that a normal taxpayer, with common knowledge and normally diligent, understands the sense of it (although may disagree with its sense) and perceives that it is not faced with a pure demonstration of arbitrariness. It is thus necessary to assess whether in the case of the present proceedings, the Administration made known the reasons that led it to disregard the expenses presented and declared by the taxpayer in its IRS declaration relating to the year 2014 and if, in the case, the reasons on which the issued assessment was based are understood.

2. Upon examination of the case file, it is verified that the final decision that determined the corrections and, consequently, the impugned assessment has the following content: "from the analysis carried out on the documents/submissions presented in the prior hearing stage, regarding the notification of the divergence(s) in the Form 3 income declaration for the year 2014 with identification .../99, the declared elements were not proven, therefore by my decision of 2015-12-29 the following corrections were determined to be effected:

[THIS IS TABLE:
Annex | Section | Field | Declared Value | Value to Correct | Final Value
F | 04 | 402 | €691.04 | €500.00 | 191.04
F | 04 | 408 | €41,086.68 | €40,985.27 | 101.41
]

This is all the substantiation contained in the notification, after the response of the taxpayer in the prior hearing stage was allegedly considered.

Will this substantiation be sufficient?

1. It is understood that the substantiation is insufficient, which is equivalent to lack of substantiation, if its content is not sufficient to explain the reasons why the decision was made. In other words, the substantiation must be sufficient, and is only so if from the decision it is possible to understand which facts and legal norms explain and support the final decision. The factual reasons and legal grounds of the decision must be perceptible, clear and understandable in light of the legal provisions mentioned and/or the principles invoked. The understanding of the STA regarding legal substantiation has been that it is considered sufficient with the reference to the concrete applicable legal provisions, the relevant principles, the legal regime or the well-determined legal framework. Even admitting, exceptionally and in very atypical cases (hardly compatible with the nature of the tax legal obligation of strictly legal origin), that the applicable legal provisions are not mentioned in the substantiation of the act, it shall always be necessary to indicate the legal framework that led to the act or decision, and this must be perfectly cognoscible from the perspective of a normal recipient, so that the legal reasons that determined it are perfectly intelligible.

2. Now, in the concrete case, being an official assessment issued after the corrections made, which disregarded a set of specific deductions of category F, with direct impact on the determination of the net income of this category and, consequently, on taxable income, it is not understood nor can be accepted as sufficient substantiation the laconic conclusion according to which "the declared elements were not proven...". There is not a single legal norm mentioned, a principle or interpretation drawn from the law that supports such conclusion. Furthermore, from the documentation attached to the case in annex to the arbitral request, as well as from the administrative process filed by the TA, it is possible to conclude that vast documentation supporting the specific deductions made by the taxpayer in category F was attached. Thus, the TA should undoubtedly substantiate specifically, clearly and unequivocally why this documentation was not sufficient, or could not be accepted or what the legal reasons were that did not allow the taxpayer to deduct such expenses, which it supported (which is not questioned by the TA) and whose expectation would be to deduct for the determination of taxable income for IRS purposes. The TA could even have had good reasons to conclude in this manner, but it was required to evidence them, concretely, clearly and sufficiently, so that we would understand the factual and legal reasons that led it to the concrete decision.

3. In light of the elements filed with the case, such substantiation is clearly insufficient, coming close to a situation that we may designate as absolute lack of substantiation. However, as we have already made clear throughout the preceding exposition, insufficient substantiation is equivalent to lack of substantiation for all legal purposes. Furthermore on this matter, it should be said that, even if different understanding were to be had regarding the alleged defect of lack of substantiation, we would still be faced with a situation of violation of law, by absence of demonstration of the factual and legal presuppositions underlying the act performed, embodied in the corrections made and in the issuance of the additional IRS assessment here impugned.

4. Furthermore, the TA's allegation to set aside the defect of lack of substantiation does not hold. For it cannot come to say that the fact that in its arbitral request the claimant revealed knowing or reaching the reasons that determined the impugned assessment, under penalty of subverting the entire legal and constitutional binding framework in force. The recipient cannot substitute itself for the author of the act, nor can the exercise of its guarantees of challenge prejudice it. Substantiation is a requirement of the act itself, incumbent upon its author to comply with the law and the functional obligations to which it is bound, including the obligation to substantiate it, factually and legally, clearly and sufficiently.

5. And there is no doubt whatsoever that the recipient has the right to know which legal framework was taken into consideration, under which legal regime the author of the act understood performing it, which legal norms and which interpretation led it to conclude as it concluded, that is, that "the declared elements were not proven." Despite all the documentation submitted by the claimant, reinforced with that which it submitted in the prior hearing stage (which the respondent converted into an administrative complaint), the respondent concludes that the declared elements (the expenses) are not found to be proven. The question is why?

The respondent, in its response, does not question the duty of substantiating the corrections, nor could it be otherwise, but everything that may now be said is totally outside the content of the act and even demonstrates, with considerable evidence, the absence of substantiation of the impugned assessment. The tax administration is bound by the law, being unable to act except in cases where it permits, nor in a manner different from what it imposes, therefore substantiation is essential so that the factual and legal reasons underlying the act performed are understood. Being a matter of a set of expenses with leased properties, which constitute specific deductions of category F, it is not enough to say that they are not found to be proven. It was necessary that the documentation attached be critically analyzed and the recipient of the act be properly informed about which was the factual situation considered, which law was interpreted and applied. For this very reason, it is also not sufficient merely to indicate a legal norm (which in the case did not even occur), adding that the factual situation does not fall within its scope. Even this type of substantiation is considered incomplete, since it is a conclusion not preceded by a consequent and logical explanation that supports it. Even after analyzing the documentation delivered in the prior hearing stage (converted into an administrative complaint), nothing was said concretely about the documentary elements newly submitted with that pronouncement. It was not demonstrated that, in light of the reference norms (which it does not even indicate), the elements submitted by the claimant were not sufficient or adequate to support the deductions of these expenses. And it should not be said that previously it had notified more enlightened reasons underlying, since this is not extracted from the documentary elements filed with the case, and in any case, the required substantiation would always have to be inserted in the final act to be notified to the taxpayer. It should be borne in mind that this notification occurred after a relevant change in circumstances, given that the TA had already notified the final decision previously, without even waiting for the deadline for the claimant to exercise its right of hearing to expire, and well knowing that this resulted in a procedurally invalidating formal defect, it then decided to convert the response filed into an administrative complaint. It is certain that, curiously, the determination or decision of the TA was taken, irremediably and independently of whatever the claimant would come to argue or the documents attached to prove the expenses. It is absolutely evidenced, by the hasty manner that led to the final decision, without respect for the deadline set for prior hearing. It is evident that the TA's purpose with the initiative of converting the response in the prior hearing into an administrative complaint was solely to correct the formal defect by omission of an essential formality. It made no critical analysis of the documents delivered by the taxpayer.

1. What matters, without a shadow of doubt, is that the substantiation contained in the decision that led to the impugned assessment does not appear to be sufficient to satisfy the obligation of substantiating, and it is certain that the applicable legal regime that is provided for in article 41 of the IRS Code requires interpretative effort, incumbent upon the TA to reveal the parameters that guided it in its application. In the case of the present proceedings this revelation was not carried out, nor was it even touched upon, being non-existent, or at least insufficient the substantiation of the act. The claimant was left without knowing which the concrete substantiation of its factual and legal situation was, therefore was obliged to contest what it supposed was the motivation of the act. Indeed, the simple mention that some expenses presented by the claimant "were not proven" constitutes a conclusive discourse and not a substantiating one, which does not allow making known to an average taxpayer with normal understanding capacity the reasons justifying the corrections and the impugned assessment. It shall not be said that due to the fact that the claimant throughout the arbitral pronouncement request did not limit itself to invoking the lack of substantiation of the tax acts and invoked violation of law, developing a certain understanding regarding the expenses it presented and on the interpretation that it considers correct of the applicable legal norms, that with this it demonstrated having perfect knowledge of the substantiation of the impugned assessment. All that it invokes is, indeed, a set of arguments to demonstrate that the expenses should have been considered deductible.

2. For all that is stated above, it is concluded that the impugned assessment suffers from the defect of lack of substantiation, and therefore is illegal and must be annulled.

3. Given what has been decided regarding the alleged formal defect of lack of substantiation, the assessment of the defect of violation of law that the Claimant invokes is prejudiced, although it is manifest that suffering the act from lack of substantiation, the factual nor the legal presuppositions in which it was anchored are evidenced.

This arbitral decision concludes that the additional IRS assessment is annulled due to lack of substantiation, and the Claimant is partially successful in its request for indemnification regarding the costs of the guarantee provided through the voluntary mortgage.