IRS Withholding Tax on Per Diem Allowances: CAAD Arbitration on Daily Allowance Taxation

ARBITRAL DECISION

CLAIMANT: a…, sa (a…)

RESPONDENT: TAX AND CUSTOMS AUTHORITY

I – REPORT

A) The Parties and Constitution of the Arbitral Tribunal

1. a…, sa, collective entity no. …, with registered office at Rua de …, … -… …, …, hereinafter referred to as "Claimant", submitted a petition for constitution of a singular Arbitral Tribunal, under the terms of Article 2, no. 1, subparagraph a), Article 10 et seq. of Decree-Law no. 10/2011, of 20 January, hereinafter referred to as "RJAT" and of Ordinance no. 112 – A/2011, of 22 March, regarding the decision to dismiss the Gracious Complaint filed by the Tax and Customs Authority (ATA), seeking a declaration of illegality of the official withholding tax assessment on Personal Income Tax (IRS) and respective compensatory interest, relating to the tax year 2012, identified with the number 2014 …, attached to the arbitral petition documents as document no. 2, which is hereby fully reproduced, in the total amount payable of €10,532.95.

2. The petition for constitution of the Arbitral Tribunal was submitted by the Claimant on 21-01-2015, was accepted by the Honorable President of CAAD and immediately notified to the Tax and Customs Authority.

3. The Claimant chose not to designate an arbitrator, therefore, under the terms of no. 1, Article 6 of RJAT, the undersigned was designated by the Deontological Board of the Administrative Arbitration Center as sole arbitrator and the parties were notified of this designation on 03-02-2015. The appointment was accepted and the parties were notified of the arbitrator's designation, having not manifested the wish to refuse the designation.

4. Thus, in accordance with the provision of subparagraph c), no. 1, Article 11, of Decree-Law no. 10/2011, of 20 January, with the wording introduced by Article 228 of Law no. 66-B/2012, of 31 December (RJAT), the Singular Arbitral Tribunal was constituted on 31-03-2015. On 06-04-2015 the ATA was notified, according to the terms and for the purposes of nos. 1 and 2 of Article 17 of RJAT, to submit a response, which was submitted on 12-05-2015.

5. On 25-05-2015 the Claimant made submissions by motion, in which it does not accept the ATA's suggestion, set forth in its Response, to dispense with the production of witness testimony as unnecessary, as well as the waiver of the meeting referred to in Article 18 of RJAT. On 25-05-2015 an arbitral order was issued designating the meeting for 8 June 2015, at 14:00 hours, for the purpose of proceeding with the production of witness testimony indicated by the Claimant, hearing the parties on the issues mentioned in subparagraphs a) and b) of Article 18, and possible production of oral arguments. On 08-06-2015, at 14:00 hours, the meeting was held as designated by the tribunal, and witness B… (financial director of group A…) was examined. Upon conclusion of the examination, the Tribunal, as requested by the parties, set a period of 10 days for the Claimant to attach to the case file the initial petition of the action that was processed in the Labor Court of Braga and a period of 15 days, equal and consecutive, for the Claimant and Respondent to submit their respective written arguments.

The Tribunal notified the Claimant for payment of the subsequent arbitration fee up to the date of the pronouncement of the arbitral decision.

Claimant and Respondent submitted their Arguments within the timeframe determined by the Tribunal, in which they reinforce their respective positions already set forth, respectively, in the arbitral petition and in the Response attached to the case file.

B) THE PETITION FORMULATED BY THE CLAIMANT:

1. The Claimant formulates the present petition for arbitral pronouncement seeking the illegality of the dismissal of the Gracious Complaint filed and the consequent annulment of the withholding tax assessment on IRS, relating to the year 2012, allegedly due by force of the employment contract entered into with C…, at that time an employee of the claimant seconded to Mozambique.

2. The contested assessment sought to charge the present claimant "the withholding taxes on IRS allegedly due on the allowances paid to the worker in question, seconded to Mozambique. The amount of withholding taxes and respective interest totals the value of €10,532.95. It further requests the condemnation of the ATA to pay indemnification due for costs incurred or to be incurred by the claimant with the provision of a guarantee for the suspension of the executive process.

3. In summary, it bases its petition, alleging the following:

a) The Claimant's principal activity is civil construction and the execution of public works contracts, in Portugal and abroad;

b) For the development of this activity, namely abroad, the Claimant has the need for some of its employees to remain for longer or shorter periods outside the country, that is, expatriated; naturally, these workers must be paid allowances as aid for costs, in order to compensate them for the increased expenses incurred as a result of being expatriated;

c) The employee C… was in this situation during the period of 2012, whose employment contract dated from February 2010, and in 2012 began to perform duties in Mozambique, where he remained for long periods for the prospecting and development of the claimant's investment strategy in that country;

d) As a result, the claimant began to pay to said employee, in addition to the value of his monthly remuneration, allowances for cost aid, according to travel vouchers, attached to the case file, in accordance with the terms required by tax law, and the corresponding values never exceeded the limits established for State servants;

e) Therefore, the payments in question constitute actual allowances for cost aid, since this employee was seconded to Mozambique, away from his residence and with all the costs inherent to such secondment abroad, thus assuming a compensatory and not retributive nature, are within the legally established value limits, and therefore are not subject to withholding tax, as follows from the provision of Article 2, no. 3, subparagraph d) of the Personal Income Tax Code (CIRS);

f) It argues that the motivation for the ATA's conduct in this case has its origin in a denunciation by the employee, who in litigation with the present claimant intended to have all the value then received as cost aid recognized as remuneration;

g) The assessment of IR and interest here contested appears to be illegal, due to the defect of lack of reasoning and violation of law, by violation of the provisions of Articles 2, no. 3, subparagraph d) and 103 of CIRS, further due to violation of the rules applicable to tax substitution, by violation of the constitutional principles of proportionality, contributive capacity of individuals and taxation of collective entities on their actual profit.

h) It concludes by petitioning the declaration of illegality and annulment of the official withholding tax assessment on IR relating to the year 2012 and of the corresponding assessment of compensatory interest and the act dismissing the gracious complaint that maintained them, as well as the condemnation to pay the costs incurred or to be incurred by the claimant with the provision of a guarantee for the suspension of the executive process.

C – THE RESPONSE OF THE RESPONDENT

1. The Respondent, duly notified for that purpose, submitted a Response in the present case, in which, by way of challenge, it alleges in summary the following:

a) The essential question at issue in the present case is the legal nature of the remuneration of employee C…;

b) From the ATA's point of view, the inspection carried out, following a denunciation presented by the employee, detected declarative divergences resulting from the values in the IRS declaration (Form 3) presented by the employee and the declaration presented by the Claimant (Form 10);

c) Essentially, the ATA transcribes in its response the conclusions of the Inspection Report, highlighting that the regular character, processed in a systematic and continuous manner of the cost allowances indicates a character of permanence which fulfills the prerequisites of a secondment allowance and not cost aid;

d) Such values, designated by the Claimant as "cost aid" are accessory remuneration, and therefore constitute dependent work income covered under Article 2 of CIRS, and thus are subject to IRS, under category A, reason for which the AT proceeded with the correction of the declared income and, consequently, to the additional assessment now contested;

e) As dependent work income that it is, and in accordance with what is established in Articles 98 and 99 of CIRS and Decree-Law no. 42/91 of 22.01, which approves the withholding tax regime, entities owing dependent work income are obliged to withhold the tax at the moment of its payment or placing at the disposal of the respective beneficiaries.

f) It concludes, refuting the existence of the defect of lack of reasoning, as well as violation of law invoked by the Claimant, as well as the constitutional principles invoked, seeking the dismissal of the arbitral petition.

II - PROCEDURAL REQUIREMENTS

1. The Arbitral Tribunal is regularly constituted. It is materially competent, under the terms of Article 2, no. 1, subparagraph a) of Decree-Law no. 10/2011, of 20 January.

2. The Parties have legal personality and capacity, are legitimate and are legally represented (Cfr. 4 and 10 no. 2 of DL no. 10/2011 and art. 1 of Ordinance no. 112/2011, of 22 March).

3. The case does not suffer from defects that would invalidate it.

4. Given the positions assumed by the parties and already set out above, the documentary evidence submitted by the Claimant, that contained in the Administrative Process (PA) attached by the ATA, as well as the witness testimony produced in the present case, it is necessary to establish the facts relevant to the decision.

III - FACTUAL REASONING

A) Established Facts

1. As material facts relevant, the present tribunal considers the following facts as established:

a) The Claimant's principal activity is civil construction and the execution of public works contracts, in Portugal and abroad.

b) For the development of this activity abroad, the Claimant has the need for some of its employees to remain for longer or shorter periods outside the country, that is, expatriated;

c) Although the Claimant is headquartered in Braga, it carries out its services at various points in the country (from north to south) and abroad;

d) In 2012, the year to which the facts under analysis relate, the Claimant employed several hundred employees;

e) Of the foreign countries where it has ongoing projects, the most relevant are France and Angola, having in 2012 also invested in business expansion in Mozambique (see testimony of witness B…);

f) A… compensates its employees, seconded and expatriated with the payment of expenses against presentation of an invoice and cost allowances in order to compensate them for the increased expenses incurred as a result of being seconded or expatriated;

g) Employee C… was hired on 17.02.2010 by D…, SA (company of group A…, SA) to perform the duties of Commercial Director, with gross monthly remuneration of €3,331.00, with place of work at the company's registered office located at Rua de …, …, municipality of …;

h) On 01.01.2012 a contract for assignment of contractual position was entered into between D…, SA, A…, SA (present Claimant) and employee C…, by which the first assigned its contractual position to the second in the employment contract entered into in 2010 with that employee, which the latter expressly declared to accept (see Doc. 14 attached to the arbitral petition)

i) In conformity therewith, and as stated in clause 3 of the contract for assignment of contractual position attached to the case file, "the rights of the second Party, acquired up to now in the said employment relationship, were maintained, namely, with respect to seniority, remuneration and professional category"; (See Doc. 14 attached to the arbitral petition)

j) This assignment of contractual position occurred during a period of recession of D…'s activity, SA, and due to the opportunity to work on the project that A…, SA was initiating in Mozambique, in which there was a need for someone with employee C…'s profile; (testimony of witness B…)

k) From 29.01.2012 this employee began to perform duties in Mozambique, as Commercial Director, to explore business opportunities;

l) From then on, this employee began to perform his work duties in Mozambique, committing to carry out all necessary actions to increase the company's activity in Mozambique, define and implement commercial strategy, represent the company and develop institutional relations with local authorities, identify business opportunities for the company's growth;

m) As consideration for his work performance in Mozambique, said employee received, in addition to the contractually agreed salary, cost allowances, according to travel vouchers to be presented, as well as a set of additional conditions, all related to the status of expatriate employee, some of which appear on the expatriate employee information sheet;

n) As follows from Labor and Tax Law, the company is obliged to pay various amounts to its employees in addition to regular salary, such as statutory or contractualized subsidies, compensation for exemption from working hours, meal and vacation subsidies and, among others, cost allowances intended to compensate for expenses incurred in business travels on behalf of the company;

o) The same occurred with C… as a consequence of being temporarily expatriated in Mozambique, making some trips to Portugal for vacation or work meetings;

p) This employee always resided near Braga with his wife who was also an employee of the Claimant;

q) The Claimant began to process payment to former employee C…, in addition to his remuneration or salary, of cost allowances, in order to compensate this employee for the increased expenses related to travel, food and accommodation that he had to incur by having to remain in Mozambique and also travel in this country to promote business opportunities;

r) All as per the travel vouchers in the case file;

s) Different receipts were processed relating to the payment of salaries and cost allowances, these latter stating that the payments made for cost aid were not subject to IRS taxation and were not subject to withholding tax;

t) The values of cost allowances paid to employee C… respected the limits provided for in the regime applicable to State servants for travel abroad;

u) At the end of 2012, employee C… ceased his work with the Claimant, in a litigious process, which is properly documented in the present case; (Doc. no. 5 attached to the arbitral petition and document attached to the case file by motion of 19.06.2015)

v) The Employee filed a labor action seeking compensation of approximately € 75,000 for the alleged termination of the employment contract at his initiative with just cause, which ended by agreement, with reduction of the claim to the value of €25,000.00;

w) He also submitted reports to the Tax Authority and Social Security;

x) Following the report submitted to the ATA, a tax inspection procedure was initiated that led to the preparation of the Report proposing the corrections corresponding to the withholding taxes on IR that gave rise to the tax assessment under discussion in the present case;

y) He also submitted a substitute declaration for his IRS declaration (Form 3) submitted with reference to the year 2012, in order to include the cost allowances as remuneration, which resulted in the divergences mentioned in the Inspection Report, namely:

i. The employee declared (in the substitute declaration) having received as remuneration the sum of €65,715.69, subject to withholding taxes of €21,141.08 and social security contributions of €7,228.73;

ii. Already the Claimant, in the Form 10 presented, declared as income of employee C…, the value of €44,830.05, withholding taxes of €12,018.00 and social security contributions of €4,931.29, values that correspond to those declared by the employee himself in the IRS declaration (Form 3) initially presented;

iii. From this resulted the divergences mentioned in the Inspection Report and which gave rise to the assessment of the value of €9,123.08 as withholding taxes, plus interest, contested in the present case;

z) From the Inspection Report that supports the contested assessment it follows that in the AT's view the cost allowances that had been paid in 2012 by the Claimant to employee C... should be considered as remuneration and as such subject to withholding taxes on IRS, adhering to the thesis defended by the former employee of the Claimant;

aa) The inspection procedure in question lasted only one day, having been initiated on 28 January 2014 and terminated the following day;

bb) It is established that the values of cost allowances under discussion in the present case never exceeded the limits established for State servants;

cc) The Claimant made submissions at the hearing on the draft inspection report, as appears in the documents attached to the case file attached to the arbitral petition and in the Administrative Process attached by the Respondent;

dd) The ATA maintained its unchanged position which appeared in the final Inspection Report, promoting the respective tax and interest assessment;

ee) The Claimant, not conforming to this assessment, filed a Gracious Complaint, which, having exercised the right to be heard, was dismissed on grounds identical to those in the Inspection Report;

ff) Following this dismissal, the Claimant submitted the present arbitral petition.

gg) The parties submitted their respective arguments as they appear in the case file and which are hereby fully reproduced.

hh) The Claimant provided a bank guarantee in the amount of €13,618.29, as per the document attached by the claimant to the case file attached to the Arguments: Bank Guarantee provided by Caixa Geral de Depósitos, on 04.07.2014, valid for one year and renewable in subsequent years.

B) UNESTABLISHED FACTS

1. There are no unestablished facts with relevance to the decision to be rendered.

C) REASONING FOR THE ESTABLISHED FACTS

1. The facts described above were established as follow from the factual matter accepted by the parties and set forth in their respective procedural documents, in the documents that the Claimant attached to the case, attached to the Arbitral Petition and, subsequently, following the meeting held on 8.06.2015, at the request of the ATA accepted by the Respondent and the Tribunal, as well as in the documents that comprise the administrative process of gracious complaint attached to the case file by the ATA, and also in the testimony of the witness examined, who demonstrated rigorous knowledge of the facts and internal procedures of the company now Claimant relating to the processing of salary remuneration and other subsidies, as well as the cost allowances paid to expatriate employees, namely, with respect to the employee that is at the origin of the present case. The Witness proved to be credible by the knowledge and reason for knowledge demonstrated, given the professional functions exercised.

IV – ISSUES TO BE DECIDED AND LEGAL REASONING

1. It is necessary, therefore, to assess and decide the issues to be resolved, as they are configured by the parties in the present case and which are the following:

a) On the alleged defect of form due to lack of reasoning;

b) On the Defect of violation of law

c) On the violation of the constitutional principles of taxation on actual profit, taxation of individuals according to their contributive capacity and proportionality;

d) On the illegality of the assessment of compensatory interest;

e) On the petition for indemnification for costs incurred with the provision of a bank guarantee for the suspension of the fiscal enforcement process.

1. The Tribunal will assess the merits of the issue, taking cognizance of the defects invoked in the order indicated by the Claimant.

A) On the Defects of Form due to Lack of Reasoning and Violation of Law, invoked by the Claimant:

1. The Claimant alleges absolute lack or insufficiency of reasoning of the contested assessment, inasmuch as "it remains unexplained how the reference to some (alleged) inconsistencies in the travel vouchers made available by the Claimant leads or even permits questioning the qualification of all payments made by the Claimant in favor of its former employee C... as cost allowances and to sustain their inclusion in the category of dependent work income. (…) In particular, throughout the Final Inspection Report, the AT recognizes and asserts the facts that would impose on it to recognize that the payments in question are actual cost allowances, however ultimately the AT ends up sustaining the contrary without dismissing or disproving those same facts. That is, the AT recognizes that the former employee C... was seconded in Mozambique, the AT does not question that during the period in which he was expatriated the same former employee received payments from the Claimant that respected the limits of cost aid to State employees and the AT knows and declares that itineraries exist and were made available to it the travel vouchers that justify those payments. In this manner, it appears to the Claimant that the sole basis for the AT's action is the report presented by the Claimant's former employee, Mr. C..., without the AT having concerned itself — for a moment — in analyzing independently the allegations of that person and, more importantly, in confronting them with the facts and with the law applicable to them." (…)

2. By the summary of argumentation set forth above and having analyzed the inspection report that supports the final decision of the procedure and the contested assessment, it appears that a set of arguments extracted from the analysis of the facts reported by employee C... in the reports submitted to the ATA and appearing in the initial petition presented in the case processed in the Labor Court of Braga. Driven by the employee's denunciation, who acting intentionally in his own interest devised an argumentation strategy oriented to petition for compensation far superior to what he could petition for by reference to the employment contract in effect, the tax inspection concludes directly and immediately for the existence of divergences capable of originating recourse to corrections of the values of withholding tax processed and declared by the employer entity (present Claimant). For this reason, the inspection undertaken began on 28 January 2014 and ended on 29 January 2014.

3. In this regard, this Tribunal clarifies that it is its understanding that the elements contained in the aforementioned labor case, attached to the present case, cannot at all sustain the conclusions of the inspection report and consequent tax assessment, inasmuch as the burden of proof that falls upon the ATA for the complete demonstration of the grounds for recourse to the corrections made does not comport with such procedure. From the case file no additional inquiries emerge that were carried out by the inspection to ascertain the veracity of what was alleged by said employee. In turn, it is clear that this person presented a first IRS declaration (Form 3) in perfect conformity with the values processed, paid and declared by the employer entity, which he subsequently altered, through a substitute declaration in which he declares as remuneration the value received as salary and cost allowances, with the clear purpose of exercising "revenge" against the employer entity that had dismissed him for breach of trust. He acted, therefore, under this conditioning, trying to achieve a double effect: to support a high claim for indemnification and to harm the employer entity with whom he entered into litigation.

4. Thus, respect for the principles of impartiality and inquisitorial nature determines that a correct analysis of the relevant facts in the course of a tax procedure would lead, from the outset, to meticulous inquiry of the facts, totally independent and impartial to ascertain whether what was alleged by the employee in the presentation of the substitute declaration was or was not factual truth. But it is certain that the ATA assumes as true such facts, without any additional inquiry, without fulfilling the duty to ascertain whether the same corresponded to the truth or not, and thus maintained its position, even after the claimant demonstrated that the employee ended up reducing the claim from €75,000.00 to €25,000.00, as appears from the documentation attached to the case file. To which it is added that the facts invoked by the employee in those case files were not established, nor were even appreciated by the Court, and even if they were, the ATA would never be relieved of the investigation to be carried out in the tax inspection files conducted in less than 24 hours.

5. It also follows from what is contained in the Report that serves as support for the assessment the allegation that there were discrepancies (values reduced to cents) between the travel vouchers provided by the employer entity and those presented by the employee. But, even if such discrepancies were considered relevant, the corrections to be made would necessarily be of "cents", observing the rigorous correction of such discrepancies. What does not appear to be reasoned is that, having detected these minimal discrepancies, the corrections made consist of considering as remuneration all values paid to the employee as cost allowances, completely disregarding such values.

6. It also follows from the inspection report that the values processed as cost allowances added to the value of net remuneration approaches the value in the expatriate employee information sheet regarding Mr. C…. However, the information sheet in question does not replace the content of the employment contract and the contract for assignment of contractual position entered into and attached to the case file. The value in said information sheet appears to correspond, indeed, to the determination of the foreseeable value to be received by this expatriate employee considering the value of the cost allowances contemplated and calculated based on the time and period of the secondments. It does not appear to us that any other conclusion follows from this document, to which it is added that it certainly does not constitute any alteration of content to the employment contract underlying the relationship of this employee with the Claimant. So much so is this that, in the periods when this employee was not seconded in Mozambique such values were not processed (see for example the period of paternity leave).

7. Finally, the invocation of the provision of Article 103, no. 4 of CIRS appears merely conclusive and insufficient to sustain the reasoning of the decision to proceed with said arithmetic corrections. Having reached that point, it is important to note that the foundational norm, invoked in the report to sustain the official assessment by correction of the values of withholding taxes, does not appear applicable in the case of the present case. It is noted that the provision of Article 103 of CIRS provides the following:

8. "In case of tax substitution, Article 28 of the general tax law is applicable, without prejudice to the provisions of the following numbers.

9. …

10. …

11. Where it is a question of income subject to withholding that has not been accounted for nor communicated as such to the respective beneficiaries, the substitute assumes joint liability for the tax not withheld."

It is now important to recall what Article 28, no. 2 of the GTL provides:

"2. When the withholding has the nature of payment on account of the tax due in full, the liability for the tax not withheld falls on the substituted party originally and on the substitute subsidiarily, the latter being further subject to the compensatory interest due from the end of the deadline for payment until the end of the deadline for filing the declaration by the original responsible party or until delivery of the tax withheld if earlier."

1. Being thus, it is manifest that the ATA acted wrongly when, without further inquiries, it deemed it acquired that the facts declared by the employee in the substitute declaration were true. It also acted wrongly when it assumed that the values paid as cost allowances should not after all be accepted as such, without any investigation that went to the bottom of the issue and truly ascertained whether this and other employees of that company, in equal circumstances, received said values of cost allowances, limiting itself to giving as correct facts declared by an employee in litigation with the company. It is recalled that this employee only reported this situation after having entered into litigation with the company, for up to this point and throughout the entire year 2012 he received such amounts, signed all receipts (for salary and other payments) without ever having complained to his employer of a different procedure, which well reflects the intent of revenge of his denunciation. However, as follows from the law (Article 28, no. 2 of GTL) in a case with these contours should, in the first instance, the employee himself have been called to fulfill his tax obligation, since the substitute is only subsidiarily liable.

Finally, the ATA also acted wrongly, inasmuch as if there was an irregularity in the payment of cost allowances to this employee, in a company where several hundred employees are regularly in the situation of expatriates, it proceeded with a one-day inspection, without inquiring how far such irregularity would also affect other employees.

1. Having established this, it follows that the reasoning is insufficient and even incongruous as to the disregard of the cost allowances and merely conclusive as to their subjection to withholding tax. But it further follows that the contested act suffers from the defect of violation of law due to incorrect application of the law to the concrete case, based on manifest error about the factual and legal presuppositions underlying the contested assessment.

2. The jurisprudence of the Superior Courts has come to consider that, "with respect to the corrections made with reference to the payment of cost allowances, the AT must substantiate its position in a concrete and detailed manner, it not being sufficient the formulation of conclusive and generic judgments (…) not accepting as a ground for non-acceptance of the amounts declared by the taxpayer as "cost allowances" the argument that such amounts "have a permanent character", "are paid for the entirety of calendar days throughout the 12 months of the year (…) are assertions of content so vague and generic that one is left not knowing whether it is much or little, more or less, for which, for the clarity of the decision, should have been made concrete the situation of the contested party, which, as a premise of the syllogism made, should also have been indicated. (…) Otherwise, the grounds of fact and law of the decision are not explained which, thus, is not clear, not permitting, through its terms, that the facts and law based on which it was decided be grasped with precision, nor sufficient, because it does not enable the administered party a concrete knowledge of the motivation of the act, that is, the reasons of fact and law that determined the organ or agent to act as it acted, and much less congruent, since the decision does not constitute a logical and necessary conclusion of the motives invoked as its justification, not involving between them a judgment of adequacy." - Cfr. Acc. TCAS, of 2.12.2008, handed down in case n. 0206/08; Acc. TCAN of 17/05/12, judgments of 12/03/13, case n. 01674/13, of the STA and the judgment of TCAS of 26/06/14, case n. 5778/12» — cfr. judgment of the TCA South, of 5 February 2015, handed down in case n. 07442/14 (cited).

3. In this sense, Jurisprudence has come to consider as sufficient reasoning that which is based on arguments or grounds capable of giving the recipient of the decision the logical and legal process that led to the decision embodied in the tax assessment. The requirements of reasoning of the act in cases of application of arithmetic corrections is particularly demanding, inasmuch as it imposes objective demonstration without margin for doubt about the corrected values. To which it is added that, being arithmetic corrections, these cannot be grounded in indicia or subjective convictions of the technicians who carry out the inspection. This type of correction is based on calculations or values determined in an objective and direct manner. Hence, reasoning that is only factual or only legal, or merely conclusive, vague or through recourse to indicia or subjective convictions, must be considered insufficient.

4. In light of the foregoing, the report grounding the contested assessment appears conclusive, based on facts declared by someone who had a personal and selfish interest in declaring something in contradiction with what was previously declared, and in disagreement with the terms resulting from the employment contract, whose conditions, rights and benefits remained unchanged in the relationship with the Claimant by force of the contract for assignment of contractual position entered into between the parties and attached to the case file. Thus, in the case under analysis the reasoning appears insufficient and incongruous.

5. It is true that jurisprudence has also come to consider that the duty of reasoning is fulfilled even though, in summary form, through a declaration of agreement with previous information, opinions or proposals. Being that, in tax matters, such duty of reasoning should be considered as more demanding when the ATA proceeds with arithmetic corrections or recourse to indirect methods. In any case, it must always contain the applicable legal provisions, the qualification and quantification of the tax facts, as well as the operations for determining the taxable matter and the tax. Such requirements are imposed with greater rigor whenever the determination of taxable matter results, as in the case of the present case, from the application of arithmetic corrections.

6. But, further in order to better determine the scope of what is discussed in the present case, it will be important to analyze, with reference to the matter at hand, the correct qualification of the payments made by the Claimant and reflected in the aforementioned Travel Vouchers, which are referred to in the inspection report that serves as basis for the contested assessment. To that end, it is necessary to take into account the labor regime underlying, based on agreement between the parties, which is characterized as income of category "A", in light of the CIRS, that is, income arising from a legal relationship of dependent work. This fact is undisputed and acknowledged by the intervening parties.

7. There is no doubt in light of the facts established in the case that between the Claimant and employee C... there existed a dependent work relationship (see employment contract and agreement for assignment of contractual position attached to the case file). Under the terms proposed to the employee in question, by force of his secondment to Mozambique, to perform there the duties of Commercial Director of the Claimant, to the base salary in effect (and which remained unchanged) would be added payment of daily cost allowances, to cover expenses resulting from his condition as an expatriate employee. In the case at hand and according to the witness examined in the case, the Claimant had and has several hundred employees seconded to various foreign countries, these being the conditions offered generically to all, although in certain countries, as is the case of Mozambique, the high cost of living is taken into account (see testimony of the witness examined in the present case). Under Article 260, no. 1 of the Labor Code, in effect at the time of the facts, such amounts attributed as cost allowances were not considered remuneration.

8. In fiscal terms, Article 2, no. 3, subparagraph d) of CIRS establishes that "Cost allowances and amounts received for the use of own automobile in the service of the employer, in the part in which both exceed the legal limits or when the prerequisites for their assignment to State servants are not observed and amounts for travel, trip or representation expenses of which no accounts have been given by the end of the fiscal year".

9. Under no. 14 of the aforementioned Article 2, the legal limits provided for in this article shall be those annually fixed for State servants, resulting from Decree-Law no. 192/95 of 28 July (officials and servants who travel abroad) and Decree-Law 106/98, of 24 April (officials and servants who travel within national territory).

10. It has been settled in jurisprudence that, in IRS terms, cost allowances only constitute remuneration in the part that exceeds the legal limits mentioned above. By way of mere example, the following Judgments can be cited: Acc. STA, of 22/05/2013, Proc. 0146/13; Acc. STA of 12/03/2008, Proc. 01065/07; Acc. STA of 23/04/2008, Proc. 01044/07 and also Acc. STA of 06/03/2008, Proc. 01063/07.

11. It is established in the present case that the value of the cost allowances processed to the employee in question did not exceed such limits, considering his condition as an expatriate and the values applicable to employees seconded abroad. The contested question is whether this value integrates the value of cost allowances as the Claimant contends and follows from the documentation attached to the case which refers to them as such, or whether such values would correspond to accessory remuneration, under the terms provided for in no. 4 of subparagraph b) of no. 3 of Article 2 of the IRS Code.

12. In the systematization of Article 2 of the IRS Code, in addition to the general rule provided for in no. 1, the legislator decided to include a set of special rules throughout no. 3 with the objective of ensuring effective taxation of income described therein, excluding those intended as cost allowances within legally applicable limits. Thus, the cost allowance regime requires the application of the "prerequisites for their assignment to State servants" (subparagraph d) of no. 3 of Article 2 of the IRS Code) provided for in Article 2 of Decree-Law no. 192/95, of 28 July, which regulates the assignment of cost allowances for secondment in public service abroad and to foreign countries.

Having defined the applicable provision of incidence, it falls to determine whether the value of cost allowance assigned complies or not with the legally fixed limits and does not result in an economic advantage to disguise remuneration assigned to the employee seconded abroad.

1. Having regard to the facts established as proven, the answer to that question must be negative, inasmuch as the condition of being seconded abroad implies a set of daily expenses that justify the assignment of cost allowance, precisely, within the limits provided for in the law. This is the case of employee C... considered in the present case.

2. The raison d'être of the permission to assign these values of cost allowances, if contained within the limits established by law, without subjection to withholding taxes on IRS, has precisely to do with the fact that an employee seconded away from his residence (in this case, away from his country) has to incur a whole set of expenses that justify and impose the assignment of just compensation, under penalty of not doing so imposing a disproportionate cost on the employee, absent from his country, far from family and without any daily support, totally deprived of the comfort of his home.

3. In the case under discussion in the present case, this is verified, being a settled point that it was a young employee, married to an employee of the Claimant, resident in Braga and who was pregnant with the couple's first child. Nothing points to the effect that this value of cost allowance represents an increment of hidden remuneration, with the intent to avoid the associated charges (withholding taxes on IRS and social security). We do not discern, in this case, any actual economic advantage to the employee or increment of personal income resulting from the assignment of said cost allowances to an employee expatriated to another continent and in a country like Mozambique. Being certain that, under the terms of the provision of art. 74, no. 1 of the GTL, it fell upon the ATA the burden of proof that such allowances were, after all, disguised remuneration. This did not occur, certainly, in the present case.

4. It was not put in question in the case the legal nature of the cost allowances are amounts placed at the disposal of the employee to compensate the costs due to his condition as an employee seconded within the country or abroad, in the service of the employer. It follows from the law, as has been said above, that the qualification of a payment as cost allowance depends on the employee having made the secondment on the service of the company, according to the respective itinerary sheets, and such secondment and stay abroad implying expenses to be compensated with the payment of cost allowances. In these circumstances, the tax legislator renounces the taxation of any economic advantages that the employee could obtain as a consequence of the receipt of cost allowances, provided that the same remain contained in a certain quantitative limit provided for by law for State servants — cfr., Article 2, no. 3, subparagraph d), of the IRS Code. In the case of the files all the prerequisites on which depends the non-taxation of said values are verified, for which reason the same are exempt from withholding tax. – In this sense, see Acc. TCAN, of 13.02.2014, proc. n. 00237/06.9BEBRG; Acc. TACAN, of 08.05.2008, proc. n. 00272/06.7BEPNF, among others.

5. It is further added that the ATA did not demonstrate (being that the burden of proof fell upon it) that the payments in question did not constitute actual cost allowances. It merely concludes in that manner, induced into an error of appreciation resulting from having assumed as true the facts alleged by the employee in a labor case in which nothing was established, on the contrary, the reduction of the claim from €75,000.00 to €25,000.00 and the realization of the agreement in the scope of the case induce, contrary to what the ATA concludes, that the employee feared seriously for the consequences of a possible dismissal of the action.

6. Thus, once again, the existence of the defect of form due to lack of reasoning as to the disregard of allowances as cost allowances is reinforced, to which is further added the defect of violation of law due to error about the presuppositions of

7. In this manner, verified the defects of form due to insufficient and incongruous reasoning (which is equivalent to lack of reasoning) and violation of law as set forth above, which vitiate the official withholding tax assessment contested and respective interest, as well as the act dismissing the gracious complaint that maintained them, the same must be annulled with the legal consequences.

B) Regarding the Petition for Condemnation to Pay Costs of the Guarantee Provided

1. The Claimant further formulates a petition for indemnification for undue guarantee.

In harmony with the provision of subparagraph b), Article 24 of RJAT, the arbitral decision on the merits of the claim of which no recourse or challenge is available binds the tax administration from the end of the deadline provided for recourse or challenge, this having to, in the exact terms of the pronouncement of the arbitral decision in favor of the taxpayer and up to the end of the deadline provided for the voluntary execution of sentences of tax courts, "restore the situation that would exist if the tax act that is the object of the arbitral decision had not been undertaken, adopting the acts and operations necessary for that purpose".

1. In the legislative authorization on which the Government based itself to approve the RJAT, granted by Article 124 of Law no. 3-B/2010, of 28 April, the institution of arbitration is characterized as an alternative form of jurisdictional resolution of conflicts in tax matters, which "the tax arbitration process should constitute an alternative procedural means to the process of judicial challenge and to action for the recognition of a right or legitimate interest in tax matters".

2. Although Article 2, no. 1, subparagraphs a) and b), of RJAT uses the expression "declaration of illegality" to define the competence of the arbitral tribunals operating in CAAD and does not make reference to constitutive (annulment) and condemnatory decisions, should be understood, in harmony with the said legislative authorization, that the competencies understood therein include the powers that in judicial challenge process are attributed to tax tribunals in relation to acts whose assessment of legality falls within their competencies. Understanding that has come to be followed in numerous arbitral decisions, being already considered as settled. Although the process of judicial challenge is essentially a process of mere annulment (Articles 99 and 124 of CPPT), an award of condemnation of the tax administration to pay indemnificatory interest and indemnification for undue guarantee can be handed down therein.

3. In truth, although there is no express norm to that effect, it has been pacifically understood in tax tribunals, since the entry into force of the codes of the fiscal reform of 1958-1965, that a petition for condemnation to pay indemnificatory interest can be combined in judicial challenge process with the petition for annulment or declaration of nullity or nonexistence of the act, because in those codes it is stated that the right to indemnificatory interest arises when, in gracious complaint or judicial process, the administration is convinced that there was an error of fact attributable to the services. This regime was, subsequently, enshrined in general form in Article 24, no. 1 of the Tax Procedure Code, which affirms that "there shall be a right to indemnificatory interest in favor of the taxpayer when, in gracious complaint or judicial process, it is determined that there was an error attributable to the services". Also the GTL, in its Article 43, no. 1, establishes that "indemnificatory interest is due when it is determined, in gracious complaint or judicial challenge, that there was an error attributable to the services from which results payment of the tax debt in an amount superior to the legally due". Finally, in no. 2, Article 61 of CPPT it is stated that "if the decision recognizing the right to indemnificatory interest is judicial, the deadline for payment is counted from the beginning of the deadline for its voluntary execution".

4. Already with respect to the petition for condemnation to pay indemnification for provision of undue guarantee, Article 171 of CPPT, establishes that "indemnification in case of bank guarantee or equivalent improperly provided shall be required in the case in which the legality of the exigible debt is contested" and that "indemnification must be requested in the complaint, challenge or appeal or in case its ground is supervenient within 30 days of its occurrence".

5. Thus, there is no doubt that the process of judicial challenge encompasses the possibility of condemnation to pay undue guarantee and is, in principle, the appropriate procedural means to formulate such petition, which is justified by evident reasons of procedural economy, inasmuch as the right to indemnification for undue guarantee depends on what is decided on the legality or illegality of the tax assessment. And, as was said above, the petition for constitution of the arbitral tribunal has as a corollary the shifting to the arbitration process of the discussion of the "legality of the exigible debt", for which reason, as follows from the express tenor of no. 1, Article 171 of CPPT, it is also the arbitration process that is appropriate to appreciate the petition for indemnification for undue guarantee.

6. It is further added that the cumulation of petitions relating to the same tax act is implicitly presupposed in Article 3 of RJAT, in speaking of "cumulation of petitions albeit relating to different acts", which allows one to perceive that the cumulation of petitions is also possible with respect to the same tax act and the petitions for indemnification for indemnificatory interest and condemnation for undue guarantee are susceptible of being encompassed by that formula, for which reason an interpretation in this sense has, at least, the minimum of verbal correspondence required by no. 2, Article 9 of the Civil Code.

Having established this, the regime of the right to indemnification for undue guarantee is found in Article 52 et seq. of the GTL, being that Article 53, in case of undue guarantee, establishes the following:

"1. The debtor who, to suspend execution, offers bank guarantee or equivalent shall be indemnified totally or partially for the damages resulting from its provision, should he have maintained it for a period exceeding three years in proportion to the accrual in administrative appeal, challenge or opposition to execution that have as object the debt guaranteed.

1. The deadline referred to in the preceding number does not apply when it is verified, in gracious complaint or judicial challenge, that there was an error attributable to the services in the assessment of the tax.

2. The indemnification referred to in number 1 has as its maximum limit the amount resulting from the application to the guaranteed value of the rate of indemnificatory interest provided in this law and can be requested in the very process of complaint or judicial challenge, or autonomously.

3. Indemnification for provision of undue guarantee shall be paid by deduction from the revenue of the tax of the year in which payment was made."

4. In the case at hand, it is manifest that the defects of the tax assessment and the corrections made were taken at the initiative of the ATA and are its responsibility. It further follows that the Claimant in no way contributed to these errors being committed. For this reason, the Claimant is entitled to indemnification for the guarantee provided, in the enforcement process. As follows from the factual matter, the Claimant provided bank guarantee in the amount of €13,618.29 – (see document attached by the claimant to the case file attached to the Arguments – Bank Guarantee provided by Caixa Geral de Depósitos), provided on 04.07.2014, valid for one year and renewable in subsequent years.

5. However, the Claimant did not allege what damage resulted from the provision of the bank guarantee. Said in other words, what commission had it to incur with the Bank for the provision of the bank guarantee, in order to be able to suspend the enforcement of the contested assessment. Nor do we know for how long it will still have to maintain the provision of guarantee and what the final costs to incur with the same will be. The Tribunal can, however, according to the rules of normalcy and common experience, consider it established the real existence of damage from the provision of bank guarantee. But, on the other hand, indemnification, according to Article 53 above cited "(...) has as its maximum limit the amount resulting from the application to the guaranteed value of the rate of indemnificatory interest (…)".

Not knowing what the amount of the commission paid on the guaranteed value is and the Arbitral Tribunal being unable to ascertain whether it is inferior or superior to the maximum limit, it finds itself unable to make its quantification.

1. This set of circumstances, however, does not put in question the Claimant's right to see reimbursed the costs it incurred with the provision of the guarantee, which should be determined at the time when the Respondent releases the guarantee, within the limits established in Article 53, no. 3 of the GTL, and be assessed in the execution of judgment. It should, therefore, be judged as merited the petition for indemnification for the guarantee provided formulated by the Claimant, to be quantified in the execution of judgment.

C) Issues of Knowledge Made Moot

1. Knowledge of the remaining issues raised by the Claimant is made moot, namely the defects of unconstitutionality. Given the provision of Article 125, no. 1, final part and Article 608, no. 2 of the CPC, applicable by remission of Article 29, no. 1, subparagraph e), of RJAT, the judge should take cognizance in the sentence of all "issues that the parties have submitted to his appreciation, except those whose decision is made moot by the solution given to others (…)".

In light of the solution given to the issues relating to the defects of form and violation of law invoked by the claimant, knowledge of the remaining issues raised by the parties is made moot, namely those invoked as unconstitutionality.

V - DECISION

The Tribunal Arbitral hereby decides:

a) To judge entirely merited the arbitral petition and, in consequence, to annul the contested assessment, in the amount of the corrections of the withholding taxes processed and respective interest;

b) To condemn the Respondent to pay the costs incurred with the guarantee provided;

c) To condemn the Respondent to pay procedural costs, in accordance with the terms provided for in Article 2, 3 and 4, no. 6, of the Regulations on Costs in Tax Arbitration Proceedings.

VALUE OF THE CASE: In accordance with the provision of Articles 305, no. 2 of the CPC, Article 97-A, no. 1, subparagraph a), of the CPPT and Article 3, no. 2 of the Regulations on Costs in Tax Arbitration Proceedings, the value of the case is fixed at €10,532.95.

COSTS: In accordance with the provision of Article 22, no. 4, of RJAT and in accordance with the Table I attached to the Regulations on Costs in Tax Arbitration Proceedings, the amount of costs is fixed at €918.00, to be borne by the Respondent Tax and Customs Authority.

Let it be registered and notified.

Lisbon, 1 October 2015

The sole arbitrator,

(Maria do Rosário Anjos)