Process: 343/2018-T

Date: September 11, 2019

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD arbitration case 343/2018-T addressed an IRS additional assessment of €11,248.55 for the 2013 tax year, arising from alleged income discrepancies reported under the EU Savings Directive by Swiss authorities. The taxpayer challenged two amounts: €18,913.00 and €16,304.84. For the first amount, the taxpayer argued it was already declared in her IRS return, albeit in incorrect fields due to oversight, resulting in double taxation since the income was already taxed at the same 28% rate. The taxpayer demonstrated that only a €125 exchange rate difference remained undeclared. For the second amount of €16,304.84, the taxpayer contested that this represented interest earned within investment funds she held units in, but which was never made available to her personally. Under Portuguese tax law, income is only taxable when actually received or made available. The taxpayer argued the Tax Authority failed to meet its burden of proof regarding income availability. The case illustrates critical principles: the burden of proof in IRS disputes, proper application of the Savings Directive income reporting requirements, and protection against double taxation. The taxpayer exercised her right to prior hearing, paid under protest, filed a gracious complaint, and ultimately sought arbitration after implied rejection. This decision examines when investment fund income becomes taxable to unit holders and whether foreign-reported information alone suffices for additional assessments without proper verification of actual income receipt.

Full Decision

ARBITRAL TAX JURISPRUDENCE

Case No. 343/2018-T

Decision Date: 2019-09-11

Income Tax (IRS)

Value of Claim: €11,248.55

Subject Matter: IRS – Burden of Proof; Savings Directive

ARBITRAL DECISION

I. STATEMENT OF FACTS

  1. A..., holder of tax identification number..., with domicile at Rua..., No...,...,...-... Lisbon (hereinafter, the "Claimant"), came, pursuant to the terms and effects of Articles 2, paragraph 1, subparagraph a) and 10, paragraph 1, subparagraph a) of Decree-Law No. 10/2011, of January 20, which approved the Legal Framework for Tax Arbitration (hereinafter, "LFTA"), to request the constitution of an Arbitral Tribunal, with the intervention of a single arbitrator, in which the Tax and Customs Authority (hereinafter, the "Respondent" or "TCA") is the Respondent, with a view to annulling the implied rejection of the gracious complaint, as well as the act of additional assessment of Income Tax for Individual Persons (hereinafter, "IRS") No. 2017..., the additional assessment of compensatory interest No. 2017... and the respective note of demonstration of account settlement No. 2017..., all relating to the year 2013, which are underlying to it, from which results an amount payable of €11,248.55.

  2. In accordance with Articles 5, paragraph 2, subparagraph a) and 6, paragraph 1 of the LFTA, the Deontological Council of the Arbitration Centre designated the undersigned as arbitrator, who communicated acceptance of the assignment within the applicable period.

  3. The Arbitral Tribunal was constituted at CAAD on September 26, 2018, as confirmed by communication from the Chairman of the Deontological Council of CAAD.

  4. Having been notified for this purpose on October 29, 2019, the Respondent filed its response.

  5. On March 25, May 24, and July 24, the decision period was extended due to the complexity of the matter, as well as the need to analyze subsequent documentation.

  6. The Claimant alleges, in summary, that:

6.1. She was notified on August 2, 2017, of the additional IRS assessment No. 2017..., relating to income earned in the year 2013, as well as the corresponding account settlement demonstrations and compensatory interest assessment, from which results a total tax debt of €11,248.55;

6.2. Of the total amount indicated above, €9,860.90 relates to allegedly due tax and €1,387.65 corresponds to the respective compensatory interest;

6.3. The additional assessment in question was issued following an alleged discrepancy between the income declared and that which supposedly would have been earned, as notified through Official Letter No..., of April 4, 2017, from the Finance Directorate of Lisbon;

6.4. Within the scope of the referred Official Letter, the TCA came to inform that, according to the information transmitted to it by the Swiss Confederation, under the Savings Directive (Directive No. 2003/48/EC, of the Council, of June 3), she would have earned "in the year 2013, interest income itemized in the table below, in the total amount of €35,217.84, which do not appear in Annex J of the IRS Form 3 declaration";

6.5. At no time was the information provided by the Swiss Confederation made available to her;

6.6. The referred total amount breaks down into the amount of €18,913.00, deriving from bank account No..., and the amount of €16,304.84, deriving from bank account No..., with the paying entity for both being B... SA;

6.7. She exercised her prior hearing right on May 11, 2017, arguing:

6.7.1. Regarding the amount of €18,913.00, in summary that:

6.7.1.1. The same was practically identical to the value initially declared in Annex J of her IRS Form 3 Declaration of €18,787.76, the existing difference resulting from, approximately, €125.00, from exchange rate differences verified during the year 2013;

6.7.1.2. The amount in question, made available through bank account No..., corresponds to interest (€10,434.72), dividends (€19,843.18) and securities losses (€11,490.14), pursuant to the letter issued by C..., which intermediates her relationship with B... SA, the latter being the custodian of the accounts;

6.7.1.3. By oversight, the referred total amount was not correctly reported in Annex J of her IRS Form 3 declaration for the year 2013;

6.7.1.4. The income initially declared in Table 4, field 408 should have been declared in field 422, inasmuch as they consist of interest covered by the Savings Directive, and the income declared in Table 4, field 425 should have been declared in Table 4B, lines 450 and following, as these are securities losses;

6.7.1.5. None of these oversights had an impact on the level of tax due (it is merely a transfer from one field to another field).

6.7.2. With regard to the second amount, €16,304.84:

6.7.2.1. The same does not correspond to any amount that was made available to her in 2013 or in any other year;

6.7.2.2. The disparity in question allegedly derives – but without ever having been effectively proven – from the fact that interest paid within certain Investment Funds in which the Claimant holds units of participation were reported;

6.7.2.3. As clarified by the banking entity itself, the Claimant, as mere holder of units of participation in such Investment Funds, has no right to receive the income in question, since the same was not effectively made available to her;

6.7.2.4. She did not receive, had no right to receive, any income if it became due;

6.7.2.5. Notwithstanding the Investment Funds in question having earned the income in question, the same was not made available to her, nor did she transfer, was reimbursed or redeemed any units of participation relating to the income in question.

6.8. Notwithstanding having already alleged and produced proof of the above, this did not prevent the TCA from making the proposed corrections definitive, as notified via Official Letter No..., of July 17, 2017, subsequently the assessment and other documentation in question here was issued;

6.9. She made timely payment of the amount of tax additionally assessed and the respective compensatory interest despite not conforming to its illegality;

6.10. She filed a gracious complaint of the referred tax assessment, compensatory interest and account settlement demonstration on December 22, 2017;

6.11. After more than 4 months she did not obtain any decision regarding her just claim, which is why she reacted against the implied rejection that had meanwhile formed.

6.12. As to the amount of €18,913.00:

6.12.1. The information exchange that gave rise to the assessment in question was carried out under the then-existing Savings Directive regarding the taxation of savings income in the form of interest, transposed into the national legal system by Decree-Law No. 62/2005, of March 11, and successive amendments;

6.12.2. There is an oversight on her part in the declaration, however, the amount was declared and subjected to the same level of taxation to which it would have been subjected (28%, pursuant to Article 72, paragraph 1 of the IRS Code), had it been initially declared in the proper manner;

6.12.3. The only material difference in terms of taxation that occurred here relates to the fact that between the declared value and the value indicated by the TCA there is a difference of approximately €125.00, which is due, as set out above, to exchange rate variations recorded during the year 2013, the Claimant not opposing that tax be assessed on this remainder, especially since it is subject to the 28% rate, in accordance with the provision of Article 72, paragraph 1, subparagraph d) of the IRS Code, the minimum collection limit provided for in Article 95 of the IRS Code would always be respected;

6.12.4. The TCA, disregarding that the income in question had already been declared and taxed, merely corrects her IRS Form 3 declaration for 2013, adding the amount of €18,913.00, not conforming to such action as it constitutes a double levy;

6.12.5. The double levy is a ground for challenge since double levy constitutes a defect in the assessment, as the second assessment was made after the first was paid;

6.12.6. The double levy recorded constitutes a violation of the most basic principles upon which the tax system and the TCA's conduct are founded, such as the principle of taxation of income accrual, the principle of legality, the principle of proportionality, the principle of justice and, ultimately, the principle of contributive capacity with all that it entails.

6.13. Regarding the amount of €16,304.84:

6.13.1. The characterization of the income in question as "interest," pursuant to Article 4, paragraph 1, subparagraph i) of Decree-Law No. 62/2005, of March 11, is not contested, configuring the same income as capital income, pursuant to the provision mentioned above, in conjunction with Article 5 of the IRS Code;

6.13.2. What matters is to ascertain whether the income in question can be considered earned in the year in question and whether, consequently, it should have been declared, drawing such elements from the scope rules present in the IRS Code;

6.13.3. Pursuant to Article 7, paragraphs 1 and 3, subparagraph a), paragraph 2) of the IRS Code, capital income is considered obtained at the moment of being made available;

6.13.4. The income in question was earned by funds in which she holds units of participation, but which at no time, much less in 2013, was such income made available to her or was the subject of any transfer, reimbursement or redemption, which is why no obligation to declare the same fell upon her;

6.13.5. As the income was not made available to her, she could never be subject to taxation with reference to the same, which is why the assessment in question incurs violation of law, more specifically of the provision of Article 7, paragraph 1 of the IRS Code, pursuant to which the income underlying here "becomes subject to taxation" when "it is made available to its holder," which clearly did not occur;

6.13.6. The assessment in question be partially annulled in the part corresponding to the tax assessed under the amount of €16,304.84, for violation of law.

6.14. The facts alleged and proven above were not brought to the TCA's knowledge only in judicial proceedings, having already been extensively set forth from the moment she was notified to exercise her prior hearing right within the scope of the correction draft concerning her IRS for 2013.

6.15. The TCA is covered by the principle of veracity of declarations by the taxpayer, as established in Article 75, paragraph 1, of the General Tax Law (hereinafter, "GTL"), in accordance with which it is presumed that "declarations by taxpayers presented pursuant to the terms provided in law are true and made in good faith, as well as the data and determinations entered in their accounting or records, when these are organized in accordance with commercial and tax legislation, without prejudice to other requirements on which the deductibility of expenses depends," the burden falling on the TCA to prove the facts constitutive of its right, proof which it never managed to make.

6.16. Under the Agreement concluded between the European Community and the Swiss Confederation with reference to the Savings Directive, more specifically its Article 2, the minimum content of the information to be communicated by the paying agent is specifically established.

6.17. The TCA is also bound by the principle of inquiry in compliance with Article 58 of the GTL, and since elements have been brought into the procedure that demonstrate that the Claimant proceeded to declare the income earned in the year 2013, in the face of this principle, the TCA cannot limit itself to a utilitarian and convenient principle of, on the one hand, accepting without question the income declared under Form 3 and, on the other hand, seeking to assess additional tax on false income not declared when there are probative elements that clearly demonstrate that the income in question was declared.

6.18. In light of all the foregoing, it is absolutely clear that: (1) the TCA at no time rebutted the presumption of veracity of the content of the Claimant's IRS Form 3 declaration; and (2) the TCA, in the face of the evidence presented by the Claimant, took no additional steps toward discovery of the material truth, in clear contradiction with the principle of inquiry, having merely issued an additional assessment without having conclusively proven the facts constitutive of the same.

  1. For its part, the TCA argues that:

7.1. The income declaration Form 3 – IRS 2013, with No..., of taxpayers A (husband of the Claimant) and B (now, Claimant) was selected for purposes of analysis of income in the form of interest obtained abroad.

7.2. According to the information transmitted to the TCA, under the Savings Directive, it was verified that taxpayer B – now Claimant – earned interest income obtained abroad (Switzerland) in the amount of €35,217.84 and, although the now Claimant declared income in her Annex J, that amount of interest was not declared in Field 422 – Table 4.

7.3. With respect to the terms of the information exchange concluded between Portugal and Switzerland, the same is carried out by making available a keyword ("password"), which allows the TCA to access a file in Excel format made available on the official website ("site") of the tax authorities of that country, in which there is a list with all the interest income earned by Portuguese tax residents in that State.

7.4. Following the analysis carried out, the now Claimant was notified, through Official Letter No..., of April 4, 2017, to, if she so wished, exercise her prior hearing right, in accordance with the stipulation in Article 60 of the GTL.

7.5. The Claimant exercised her prior hearing right on May 11, 2017 (having been duly analyzed), the Claimant having been notified by order of June 27, 2017 that the IRS Form 3 declaration No..., for the year 2013, would be officially corrected pursuant to the provision in paragraph 4 of Article 65 of the IRS Code, which would thus give rise to the assessments now challenged in arbitral proceedings.

7.6. The assessments were issued in strict compliance with the law.

7.7. According to the applicable legislation, it appears that according to Article 5, paragraph 1, subparagraph h), sub-subparagraph iv) of Decree-Law No. 62/2005, of March 11, "savings income in the form of interest is considered as... i) income obtained upon the transfer, reimbursement or redemption of shares or units of participation in the entities referred to in the preceding subparagraph, when they have invested, directly or indirectly, through the same entities, more than 40% of their respective assets in credits and other applications that generate income provided for in subparagraphs a) to e)". It is further provided in paragraph 3 of the same article that "the following are excluded... income from organisms or entities referred to therein whose investments in credits and other applications that generate income provided for in subparagraphs a) to e) of the same paragraph do not exceed 15% of their respective assets".

7.8. No justification was presented regarding the percentages of investments made by the Claimant and the TCA being unaware, due to lack of elements, of the amounts of income that may be excluded in accordance with paragraphs 3 and 4 of Article 4 of Decree-Law No. 62/2005, of March 11, the stipulation in paragraphs 5 and 6 is applied ("whenever it is not possible to determine the part of income from interest and other economic benefits referred to in subparagraphs a) to e) of paragraph 1, it is considered to correspond to the total amount of income.") of the same legal instrument.

7.9. Thus, the TCA services proceeded properly in drafting the DCU with the following corrections to the values entered in the IRS Form 3 declaration:

7.10. It results expressly from the administrative procedure that the Claimant is the holder of the bank accounts contained in the notification sent by the TCA with the correction draft and alleges having declared an amount identical (€18,787.76) to that in the draft (€18,913.00), an amount that corresponds to bank account No... of the financial institution B... SA.

7.11. However, the amount diverges by €125.24, having been declared in different fields from that which would be correct, namely, in fields 408, 420 and 425 instead of having been entered in field 422.

7.12. Regarding the amount of €16,304.84, associated with bank account No... of the same financial institution, the taxpayer alleges not having received that amount either in 2013 or in any other year, stating that she is the holder of units of participation of Investment Funds that pay interest within them, but states not having the right to receive that income and that it was not actually made available to her, therefore considers that it is not income taxable for IRS purposes.

7.13. The banking entity C... domiciled in Switzerland delivered to the Claimant a statement of income that includes interest, dividends and gains, which served as the basis for the preparation of the IRS declaration of its clients.

7.14. The amounts contained in the statement of income of C... were entered in Annex J submitted by the now Claimant and reflect the amounts of interest (€10,434.72) and dividends (€19,843.18) and gains (-€11,490.14) earned in 2013, based on the exchange rates at the date of the operations and whose sum corresponds to the declared amount of €18,787.76.

7.15. The banking entity B... SA, in its capacity as custodian, provided information to the Respondent, which served as the basis for reporting under the Savings Directive (European Savings Directive – ESD), such reporting always being made in the currency of origin of the securities.

7.16. A document proving the "Client Report Declaration" issued by the aforementioned financial entity was presented, corresponding to the income associated with bank account No... and communicated in 2013 to the Swiss Authority under the referred Directive, amounts that coincide with the values in the correction draft contained in the notification sent to the now Claimant, based on the exchange rate at December 31, 2013 (1.3791USD).

7.17. From the analysis and justification presented by C... to the Claimant, that institution identified an oversight in the reporting of gains from the sale of bonds from D... on November 18, 2013, considering that that amount should have been classified as Accrued Interest, in the amount of €4,158.90.

7.18. As for the interest on the same security, paid on February 18, 2013, the values from the Statement of Income C... (€5,500.00) and from the... (€5,334.70) diverge, the C... justifying the difference by the fact that accrued interest was paid upon acquisition of the referred security.

7.19. The oversight identified by C... resulted in the preparation of a new Statement of Income, from which it was determined that the new amounts would be:

  • Interest €14,582.32;
  • Dividends €19,843.18;
  • Gains (losses) €15,649.04.

7.20. All earned in 2013, based on the exchange rates at the date of the operations and whose sum corresponds to the amount to be declared of €18,776.46.

7.21. The Claimant at no time presented proof that she did not earn the income imputed to her as a result of the exchange of information provided by the Swiss tax authorities.

7.22. In the face of the information provided by Swiss tax administration to the TCA, it was incumbent upon the Claimant to prove the opposite, namely, to rebut the proof.

7.23. The TCA at no time violated the articles mentioned by the Claimant, namely Articles 74 and 75 of the GTL, since it was always in possession of elements presented by the Swiss tax authorities that prove the alleged, while the Claimant for its part did not present evidence to the contrary or otherwise.

7.24. The corrections carried out by the TCA services do not suffer from any of the defects that the Claimant seeks to attribute to them, which determines the legality of the subsequent IRS assessments.

II. MATTERS OF FACT

A.1 Facts Found to be Proven

With relevance for the merit decision, the Tribunal considers the following factuality to be proven:

  1. The Claimant was notified on August 2, 2017, of the additional IRS assessment No. 2017..., referring to income for the year 2013, from which resulted a total tax debt of €11,248.55;

  2. Of the total amount of €11,248.55, €9,860.90 relates to allegedly due tax and €1,387.65 corresponds to the respective compensatory interest;

  3. According to Official Letter No..., of April 4, 2017, through which the TCA came to inform that, according to the information transmitted to it by the Swiss Confederation, under the Savings Directive (Directive No. 2003/48/EC, of the Council, of June 3), she would have earned "in the year 2013, interest income itemized in the table below, in the total amount of €35,217.84, which do not appear in Annex J of the IRS Form 3 declaration";

  4. From the documents joined to the proceedings, there is no record of the information transmitted to the Respondent by the Swiss Authorities from which, according to the TCA, the Claimant would have obtained the amount of €35,217.84 in the year 2013.

  5. In the period under analysis, the Claimant declared the following income:

i. Interest in the amount of €10,434.72;
ii. Dividends in the amount of €19,843.18;
iii. Securities losses in the amount of €11,490.14.

A.2 Facts Found Not to be Proven
  1. With relevance for the decision, there are no facts that should be considered as not proven.
A.3 Reasoning Regarding Proven and Unproven Matters of Fact

  1. Regarding matters of fact, the Tribunal does not have to rule on everything alleged by the parties, but rather has the duty to select the facts that matter for the decision and distinguish proven from unproven matters (cf. Article 123, paragraph 2, of the Tax Procedure and Process Code (hereinafter, "TPPC") and Article 607, paragraph 3 of the Code of Civil Procedure (hereinafter, "CCP"), applicable pursuant to Article 29, paragraph 1, subparagraphs a) and e) of the LFTA).

  2. Thus, the relevant facts for judgment of the case are chosen and defined according to their legal relevance, which is established with attention to the various plausible solutions of the legal questions.

  3. Accordingly, taking into account the positions assumed by the parties, in light of Article 110, paragraph 7 of the TPPC, the documentary evidence and the Administrative Procedure joined to the proceedings were considered proven, with relevance for the decision, the facts listed above.

III. ON THE LAW

  1. As provided in Article 74, paragraph 1 of the GTL "[t]he burden of proof of the facts constitutive of the rights of the tax administration or of taxpayers falls on whoever invokes them." (in the same sense, Article 342, paragraph 1 of the Civil Code).

  2. On the burden of proof, DIOGO LEITE DE CAMPOS, BENJAMIM SILVA RODRIGUES and JORGE LOPES DE SOUSA state that "(…) as a rule, the tax administration will bear the burden of proof of the presuppositions of the facts constitutive of the rights it intends to exercise in the procedure, while taxpayers will bear the burden of proving the facts that may serve to support the realization of those rights." (DIOGO LEITE DE CAMPOS, BENJAMIM SILVA RODRIGUES and JORGE LOPES DE SOUSA, General Tax Law. Annotated and Commented, Lisbon, 4th ed., 2012, p. 656).

  3. In this sense, jurisprudence also decides: "in principle, the TCA bears the burden of proof of the verification of the legal presuppositions (binding) of its action, namely whether aggressive (positive and unfavorable) and, conversely, it falls to the administered party to present sufficient proof of the illegitimacy of the act, when those presuppositions are shown to be verified, a solution now fixed by art. 74, paragraph 1 ('The burden of proof of the facts constitutive of the rights of the tax administration or of taxpayers falls on whoever invokes them.'), of the GTL and which at that time should already be considered applicable because it corresponds to the general rule of art. 342 of the Civil Code (CC), according to which whoever invokes a right bears the burden of proof of the constitutive facts, with the other party bearing the burden of proving the impeditive, modificative or extinctive facts." (cf. decision of the Supreme Administrative Court rendered in case No. 0951/11, of February 26, 2014, available at www.dgsi.pt) (bold and underlined by us) (See, also, arbitral decisions rendered in cases No. 64/2018-T, of August 22, 2018 and 25/2018-T, of February 21, 2014).

  4. From the above it is concluded that, having the TCA become aware – according to information transmitted under the Savings Directive – that the Claimant earned interest income obtained abroad (SWITZERLAND) in the amount of €35,217.84, in a first instance, it would fall to the Claimant to prove that she did not earn the referred amounts.

  5. In any case, on one hand, the TCA never presented sufficient proof that the Claimant obtained income from Swiss source in the referred amount, as it did not present the excel file made available on the website of the Swiss tax administration, or any other documents.

  6. That is, it did not present proof "capable of shaking the presumption of veracity of the operations contained in the taxpayer's records and their supporting documents" moment when it "becomes incumbent on the taxpayer to bear the burden of proof" (Cf. Decision rendered in case No. 01424/05.2BEVIS 0292/18, of February 27, 2019).

  7. But above all, this Tribunal considers that the Claimant has proven that the information to which the Swiss tax administration had access does not alter, in substance, the amount of the primary IRS assessment (without prejudice to what is said below regarding a divergence resulting from exchange rate fluctuations).

  8. Indeed, as explained below, the Claimant presented the Statement of Income of C... and explained the reason for the divergence between the amounts contained in that statement and the information sent by the Custodian to the Swiss tax administration and which must have served as the basis for the information made available to the TCA.

  9. As a rule, declarations by taxpayers must be deemed true and in good faith: "[d]eclarations by taxpayers presented pursuant to the terms provided in law are presumed to be true and made in good faith, as well as the data and determinations entered in their accounting or records, when these are organized in accordance with commercial and tax legislation, without prejudice to other requirements on which the deductibility of expenses depends." (cf. Article 75, paragraph 1 of the GTL).

  10. This presumption of veracity is rebutted when "the declarations, accounting or records reveal omissions, errors, inaccuracies or founded indicia that they do not reflect or prevent knowledge of the real taxable matter of the taxpayer" or "the taxpayer fails to comply with the duties that fall to it to clarify its tax situation, except when, pursuant to this law, the refusal to provide information is legitimate" (cf. Article 75, paragraph 2, subparagraph a) of the GTL) (underlined and bold by us).

  11. Having said this, it is concluded that the presumption of veracity is rebuttable, insofar as it admits proof to the contrary.

  12. Now, in order to prove the omission raised by it, the TCA invoked, in essence, the existence of a communication transmitted to it in light of the Savings Directive by the Swiss authorities, concerning accounts of the Claimant in the amount of €35,217.84,

  13. Considering the referred amount omitted from Annex J of the IRS Form 3 declaration.

  14. As for the probative value of information provided by other tax administrations under international mutual assistance conventions, they generally have evidential weight when substantiated and based on objective criteria.

  15. Indeed, pursuant to Article 76, paragraph 1 of the GTL "[i]nformation provided by the tax inspection has evidential weight when substantiated and based on objective criteria, in accordance with the law.", with paragraph 4 of the same article adding that the rule of paragraph 1 applies to "information provided by foreign tax administrations under international mutual assistance conventions to which the Portuguese State is bound, without prejudice to contrary proof by the taxpayer or interested party.".

  16. Now, in the arbitral decision rendered in case No. 181/2017-T, of November 14, 2018, whose thesis we adopt, it is determined that "[t]here thus falls on the TCA the obligation to bring into the tax procedure elements that allow rebutting the legal presumption, being that, in this context, the activity of the TCA is shaped by the principle of inquiry established in Article 58 of the GTL, which imposes on it the duty to practice all acts and instructional steps that prove necessary to the reconstitution of material reality.", further adding that "[i]n this measure, the TCA could not, without more, render a final decision in the tax procedure based solely on the information received within the scope of the information exchange mechanism, without attesting to the material reality underlying them, particularly in the face of elements brought into the tax procedure by the taxpayer itself." (cf. arbitral decision rendered in case No. 181/2017-T, of November 14, 2018, available at https://caad.org.pt/tributario/decisoes/decisao.php?s_processo=181&s_data_ini=&s_data_fim=&s_resumo=&s_artigos=&s_texto=&id=3042) (bold and underlined by us).

  17. It is further noted that, although there is a presumption that information provided by foreign Tax Administrations (under international mutual assistance conventions) enjoys the same probative force as information from the Portuguese authority, this presumption admits contrary proof by the taxpayer, particularly if such information generates doubts about the facts stated therein.

  18. On this point, DIOGO LEITE DE CAMPOS, BENJAMIM SILVA RODRIGUES and JORGE LOPES DE SOUSA state that "(…) to contradict the probative force of official information provided by the Portuguese tax administration, it is not necessary to prove the opposite, for the law does not attribute full probative force to them, it being sufficient to generate doubts about the facts stated therein, as results from the provision in art. 346 of the CC. Since this probative force is attributed to official information produced by the Portuguese tax administration, it will be recognized as the same to information from foreign tax administrations, as it would be incomprehensible that greater probative force be attributed to the latter than to the former." (DIOGO LEITE DE CAMPOS, BENJAMIM SILVA RODRIGUES and JORGE LOPES DE SOUSA, General Tax Law. Annotated and Commented, Lisbon, 4th ed., 2012, p. 672)

  19. However, what is at issue in the present proceedings is above all the divergence in characterization of a certain taxable income.

  20. Indeed, it is C... itself – which reported to the Swiss tax administration the information about the Claimant that must have been subsequently transmitted to the TCA – that confirms that the information reported under the Savings Directive is correct.

  21. That is, the information that served as the basis for the Statement of Income departs from the declaration on which the TCA must have based itself not due to lack of suitability of one or the other, but above all due to a difference in the characterization of income under the Savings Directive and the IRS Code.

  22. Thus, the €35,217.84 that the TCA considered not to appear in Annex J can be explained in the terms described below.

  23. As for the amount of €18,913.00, €18,787.76 were declared, although in the wrong field. In this regard, the TCA seems even to have accepted the justification presented by the Claimant, as in articles 22 to 24 of its Response it states that "as results expressly from the administrative procedure, the now Claimant is the holder of the bank accounts contained in the notification sent by the TCA with the correction draft and alleges having declared an amount identical (€18,787.76) to that in the draft (€18,913.00)," adding that this amount "corresponds to bank account No.... of the financial institution B... SA" and that "the amount diverges by €125.24, having been declared in different fields from that which would be correct, namely, in fields 408, 420, and 425 instead of having been entered in field 422".

  24. In any case, in light of the evidence presented, it is considered that, as to the referred amount, since it was declared and the corresponding tax was assessed, the assessment is illegal (with the exception of the amount of €125.24, in the terms that are explained below).

  25. As regards the value of €125.24, this was not duly declared, nor was the corresponding tax paid, therefore, as to this amount the assessment is legal.

  26. As to the remainder, €16,304.84, this results from a divergence in the characterization of income resulting from units of participation in Investment Funds that pay interest within them.

  27. It begins by clarifying that the Agreement between the European Community and the Swiss Confederation establishing measures equivalent to those provided for in the Savings Directive, with content similar to the referred legislation, is applicable to the concrete case (available at https://eur-lex.europa.eu/resource.html?uri=cellar:a5bb0db0-ab46-43f7-a73f-cc75781a232b.0016.02/DOC_1&format=PDF).

  28. In this sense, the Central Administrative Court of the South decided in the decision rendered in case No. 3/13.5BELRS, of February 23, 2017: "[i]n the case before us, the interest income earned by the Claimants is at issue, which was paid to them by Bank..., a banking institution domiciled in..., in the Swiss Confederation (cf. point 3 of the facts), a third country to the European Union (EU) and for that reason Directive 2003/48/EC, of the Council, of June 3, 2003 (Savings Directive) does not appear applicable, since it only binds the States-Members that are recipients. It is therefore important to invoke the Agreement between the European Community and the Swiss Confederation that provides for measures equivalent to those provided for in Directive 2003/48/EC, of the Council, of June 3, 2003 (…)." (available at http://www.dgsi.pt/jtca.nsf/170589492546a7fb802575c3004c6d7d/626beae87ab14cb9802580d1005d7925?OpenDocument).

  29. It results from Article 7, paragraph 1, subparagraph d) of the referred Agreement that "[f]or the purposes of this agreement, "payment of interest" is understood to mean: [i]ncome realized at the time of transfer, reimbursement or redemption of shares or units of participation in the organisms and entities below, if they have invested, directly or indirectly, through other organisms of collective investment or entities referred to below, more than 40% of their assets in credits referred to in subparagraph a):

i. organisms of collective investment domiciled in a Member State,

ii. entities domiciled in a Member State that exercise the option provided for in paragraph 3 of Article 4 of the Directive and inform the paying agent thereof,

iii. organisms of collective investment established outside the territory of the contracting parties,

iv. Swiss investment funds which, at the date of entry into force of this agreement or at a later date, are exempt from Swiss anticipatory tax with respect to their payments to individuals residing in a Member State.".

  1. Thus, the income (interest) obtained by funds (in the concrete case, C... gives the example of Funds E... and F...) are included in the communication to be made under the referred Agreement.

  2. In any case, as results from the documentation presented by the Claimant, in particular from the communications of C..., the referred amounts were not made available to the Claimant.

  3. Now, pursuant to the IRS Code, the mere obtaining of interest by funds whose participation units are held by individuals residing in Portugal does not configure a taxable fact for IRS purposes in the wording effective as of the date of the facts.

  4. Accordingly, the assessment is illegal, equally, with respect to the second parcel, in the amount of €16,304.84.

On the (Illegality) of the Compensatory Interest Assessment

  1. The Claimant requests annulment of compensatory interest associated with the additional IRS tax assessment act on the grounds that there was "gross error regarding the factual presuppositions".

  2. Pursuant to Article 35, paragraph 1 of the GTL "[c]ompensatory interest is due when, by fact imputable to the taxpayer, the assessment of part or all of the due tax is delayed or the delivery of tax to be paid in advance, or withheld or to be withheld in the context of tax substitution.".

  3. Indeed, for compensatory interest to be due, it is necessary that, by fact imputable to the taxpayer, there has been a delay in the assessment or payment of tax.

  4. However, the additional IRS assessment put into question in the present proceeding is afflicted by a partial illegality because there exists, albeit in part, fault of the taxpayer.

  5. Accordingly, partial illegality of the compensatory interest assessment contained in No. 2017... should be declared and partial annulment ensue.

IV. THE DECISION

The Tribunal Arbitral hereby decides:

a) To judge partially well-founded the request for declaration of illegality of the IRS assessment act No. 2017..., relating to the year 2013, considering legal only the part of the assessment that relates to €125.24;

b) To partially annul the IRS assessment No. 2017..., in the amount of €9,825.93;

c) To partially annul the additional compensatory interest assessment No. 2017..., in the amount of €1,382.72;

d) To partially condemn the Respondent in the costs of the proceeding, in the terms detailed below.

V. VALUE OF THE PROCEEDING

The value of the proceeding is fixed at €11,248.55, pursuant to Article 97-A, paragraph 1, subparagraph a), of the TPPC, applicable by force of subparagraphs a) and b) of paragraph 1 of Article 29 of the LFTA and paragraph 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

VI. COSTS

The amount of the arbitration fee is fixed at €918.00 pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, in accordance with Articles 12, paragraph 2, and 22, paragraph 4, both of the LFTA, and Article 4, paragraph 4, of the cited Regulation, charged to the Claimant in the percentage of 0.4% and charged to the Respondent in the percentage of 99.6%.

Let it be notified.

Lisbon, September 11, 2019

The Arbitrator,

(Leonardo Marques dos Santos)

Frequently Asked Questions

Automatically Created

What was the outcome of CAAD arbitration case 343/2018-T regarding the IRS additional tax assessment for 2013?
The complete outcome is not provided in the excerpt, but the case involved a taxpayer challenging an €11,248.55 IRS additional assessment for 2013. The taxpayer contested double taxation on €18,913.00 (already declared but in wrong fields) and disputed €16,304.84 representing investment fund interest never made available to her. The arbitration examined whether the Tax Authority properly proved income availability and whether corrections constituted improper double taxation.
How does the burden of proof apply in IRS tax disputes under Portuguese tax law?
Under Portuguese tax law, the burden of proof in IRS disputes typically rests with the Tax Authority to demonstrate the legal basis for additional assessments. However, when foreign information is received under international exchange agreements like the Savings Directive, the Authority must still prove the income was actually made available to the taxpayer. Taxpayers can rebut presumptions by demonstrating income was already declared, not received, or improperly characterized. The principle of objective truth requires proper verification beyond mere foreign reports.
What is the EU Savings Directive (Diretiva da Poupança) and how does it affect IRS taxation in Portugal?
The EU Savings Directive (Directive 2003/48/EC) required EU member states and associated territories to exchange information about interest income paid to residents of other member states. Transposed into Portuguese law by Decree-Law 62/2005, it enabled automatic information exchange about savings income. In Portugal, such interest is typically taxed at 28% under Article 72(1) of the IRS Code. The Directive aimed to ensure effective taxation of cross-border savings income while preventing tax evasion.
Can taxpayers challenge IRS additional assessments based on income divergences through tax arbitration at CAAD?
Yes, taxpayers can challenge IRS additional assessments based on income divergences through CAAD arbitration under Decree-Law 10/2011 (Legal Framework for Tax Arbitration). The process involves: filing a gracious complaint first, waiting for express rejection or implied rejection (after 4 months), then requesting arbitration within the statutory period. Taxpayers can contest assessments on grounds including double taxation, incorrect income characterization, lack of proof of income availability, or procedural violations. Payment under protest preserves the right to challenge while avoiding enforcement.
What are the legal grounds for annulling an IRS additional assessment and compensatory interest in Portuguese tax arbitration?
Legal grounds for annulling IRS additional assessments in Portuguese tax arbitration include: (1) double taxation where income was already declared and taxed; (2) failure by the Tax Authority to prove income was actually made available to the taxpayer; (3) incorrect application of income sourcing rules; (4) violation of prior hearing rights; (5) insufficient evidence supporting the assessment; (6) misapplication of international tax treaties or EU directives; (7) errors in characterizing income types; and (8) breach of legality principles. Compensatory interest can be annulled when the underlying tax assessment is unlawful or when delays were caused by the Tax Authority rather than the taxpayer.