Process: 344/2017-T

Date: January 31, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 344/2017-T) addresses the legality of an additional IRS assessment issued based on information received under the EU Savings Directive. The taxpayer was assessed an additional €24,068.64 for allegedly undeclared interest income of €88,622.80 from Swiss bank accounts in 2012. The central legal dispute concerns the burden of proof and substantiation requirements when the Tax Authority relies on international information exchange. The taxpayer argued that the assessment lacked proper substantiation, claiming no relationship with one of the identified Swiss banks (Banque B... Suisse) and asserting that income from C... Suisse had already been properly declared as dividends (€84,907.22). The Tax Authority defended the assessment under Article 76(4) of the General Tax Law (LGT), which grants probative value to information from foreign tax administrations, placing the burden on the taxpayer to provide contrary proof. The case raises critical questions about the Tax Authority's duty to substantiate assessments even when relying on international information exchange, the taxpayer's right to effective defense when challenging foreign-sourced data, and whether replacing a tax return constitutes acceptance of the underlying facts. The decision has significant implications for taxpayers with foreign income subject to automatic information exchange, particularly regarding what constitutes adequate substantiation of additional assessments and the proper allocation of the burden of proof when taxpayers dispute the existence or nature of foreign bank accounts identified by foreign tax authorities.

Full Decision

ARBITRAL DECISION

I – STATEMENT OF FACTS

Request

A…, taxpayer no. …, with civil identification number …, residing at Travessa …, no. …, …-… Cascais, hereinafter referred to as Claimant, filed, on 26-05-2017, pursuant to article 2(1)(a) and article 10 of Decree-Law no. 10/2011, of 20 January, which approves the Legal Regime for Arbitration in Tax Matters (RJAT), a request for arbitral decision, in which the Respondent is AT – Tax and Customs Authority (hereinafter referred to as Respondent), with a view to:

  • The declaration of illegality and consequent annulment of the assessment of Personal Income Tax, number 2016…;

  • The condemnation of the Respondent to reimbursement of the amount pledged as security;

  • The condemnation of the Respondent to payment of compensatory interest.

Grounds of the Request

To support its request, the Claimant alleges, in summary:

  • In the course of 2016, the Claimant was notified of a draft of amendments to its 2012 income tax return, in which it was stated that, according to information transmitted under the Savings Directive, the Claimant had earned, in the year 2012, interest in the amount of 88,622.80 euros, from bank accounts located in Switzerland, which would not have been included in its annual income tax return.

  • The Claimant actually earned income from capital of Swiss source in that year, specifically dividends in the amount of 84,907.22 euros and capital gains in the amount of 43,514.53 euros which were, however, fully and timely declared to the tax authority.

  • Following a telephone conversation with a tax administration official, believing there was only a minor discrepancy as to the amounts presented, the Claimant submitted a substitute declaration, in which it replaced the amount of 84,907.22 euros, previously declared, with the amount of 88,622.80 euros.

  • It transpired, however, that there was not a discrepancy of values as to the declared income. In the understanding of the tax administration, the amount of 88,622.80 euros should be added to the amount of 84,907.22 euros.

  • The Claimant was notified on 22 November 2016 of an additional Personal Income Tax assessment in the amount of 24,068.64 euros, referring to the income allegedly not declared of 88,622.80 euros.

  • By telephone, the Claimant obtained information that the additional income – of 88,622.80 euros – came from an account at Banque B… (Suisse).

  • The Claimant, however, does not hold any bank account at this institution.

  • Having filed a gracious complaint of the aforementioned additional assessment, this was rejected, as the Claimant failed to prove the fact constituting the right alleged by it, based on the provisions of article 74, no. 1 of the General Tax Law (hereinafter LGT).

  • Such a document cannot be considered valid, as the burden of proof belongs to the Tax and Customs Authority and this did not prove that the Claimant earned the income in question.

Response

In its Response, the Respondent AT – Tax and Customs Authority contests the request, stating:

  • The corrections in question in the case files have their origin in an exchange of information between Portugal and Switzerland, under the Savings Directive, in which interest income in the amount of € 88,622.80 was obtained by the Claimant, which were not indicated in the Personal Income Tax Form 3 declaration.

  • Having the Claimant been notified to exercise the right to prior hearing of the draft amendments to the 2012 income tax return, it did not exercise the right to prior hearing but proceeded to replace the income tax return, having only withdrawn the income from field 407 (dividends or profits – with withholding in Portugal) from annex J of Form 3, in the amount of € 84,907.22, to introduce the amount of € 88,622.80 in field 422 (income from Savings Directive no. 2006/48/CE – remaining countries not covered by the transition period).

  • However, what was at issue was not an incorrect classification of the income, but rather an omission in the declaration of income, in the aforementioned annex J of the Personal Income Tax Form 3, of 2012, which led to the issuance of an official declaration.

  • Indeed, following information exchange sent by the Swiss tax authorities, under the Savings Directive, it was found that the Claimant earned an amount of € 88,622.80, as interest, coming from that State.

  • The Swiss tax authorities informed the AT that the Claimant earned in that State the amounts of CHF 106,878.00 from C… (Suisse) SA and € 89.00 from Banque B… (Suisse) SA, as interest.

  • From the joint reading of articles 76, no. 1 and no. 4 of the LGT, "1 – Information provided by tax inspection has probative value when reasoned and based on objective criteria, in accordance with the law.

  • 4 – Covered by no. 1 is information provided by foreign tax administrations under international conventions for mutual assistance to which the Portuguese State is bound, without prejudice to proof to the contrary by the taxpayer or interested party."

  • Now, the Claimant at no time presented proof that it did not earn the income that was imputed to it, as a result of the information exchange provided by the Swiss tax authorities.

  • This is because, in light of the information provided by the Swiss tax administration to the AT, it was incumbent upon the Claimant to prove the contrary, that is, to rebut the proof.

  • What was at issue in the Claimant's initial declaration was the absence of declaration of the income mentioned whose nature was "interest" – field 422 of annex J.

  • Thus, when the Claimant submitted a substitute declaration to include the aforementioned interest income obtained in Switzerland, in field 422, of annex J of the Personal Income Tax Form 3 of 2012, the AT accepted such declaration, as it was in accordance with the information provided by the Swiss tax authorities.

  • The same did not occur with respect to the fact of having withdrawn the income of dividends or profits, with withholding in Portugal.

  • Now, having analyzed the Claimant's prior administrative petition as well as the gracious complaint, it in no way denies that it earned the aforementioned income of dividends or profits with withholding in Portugal.

  • Indeed, it even reaffirms that it received this income, in the context of the gracious complaint, by mentioning that the same originated from "C… Suisse declared in accordance with the information from that institution in the amount € 84,907.22 field 407", as on page 10 of the case file.

  • Therefore, the Claimant could never have altered the income tax return in the manner in which it did.

  • The AT at no time violated the articles mentioned by the Claimant, namely articles 74 and 75 of the LGT, since it was always in possession of elements presented by the Swiss tax authorities that prove what we alleged, while the Claimant, in turn, presented no proof to the contrary or otherwise.

  • At no time did the Claimant present "a declaration issued by the Swiss tax authority (Original) or an authenticated document in which the income obtained (its nature), the amount of income obtained, and if applicable the tax paid abroad" are specified, proof that would allow it to rebut the information provided by the Swiss tax authorities.

  • Given the foregoing, it is concluded that the corrections carried out by the AT's services do not suffer from any of the defects that the Respondent seeks to attribute to them, which determines, in our view, the legality of the subsequent Personal Income Tax assessments.

Subsequent Procedure

With the agreement of the Parties, the Tribunal determined the waiver of the meeting provided for in article 18 of the RJAT, by order issued on 21-12-2017, having been granted to the Parties successive periods to submit written closing arguments.

Claimant's Arguments

In its arguments, the Claimant alleges in summary, with relevance to the decision of the case:

  • In its response, the Respondent sustains a new version of the facts to justify the decision rejecting the gracious complaint in the sense that what was at issue was not an incorrect classification of the income, but rather an omission in the declaration of income.

  • This omission would correspond to the amount previously declared by the Claimant in field 407, which corresponded to its income from Swiss source, and which were later transposed to field 422 upon indication of the Respondent.

  • The assessment under challenge ceased to result from income reported by foreign authorities, to, allegedly, result from the fact of having withdrawn the income of dividends or profits with withholding in Portugal.

  • This version is completely different from what was notified to the Claimant by the Respondent, and which the Respondent acknowledged and maintained in the context of the gracious complaint;

  • [But] if the assessment respected "dividends or profits income" with withholding in Portugal, such should be stated in the decision on the gracious complaint.

  • In fact, in order for these to be income subject to withholding in Portugal, given the provisions of articles 71 and 101 of the Personal Income Tax Code (CIRS), they would have to be paid or made available through entities that were mandated by debtors or holders or acted on account of one or the other.

  • Thus, any withholding that existed would have been reported and would appear in the data from the Respondent's central system – and no such information was ever presented as a basis for the assessment.

  • At no time did the Respondent identify the source of the supposedly withheld income from Portugal, the entity obligated to withhold, or the failure to fulfill the tax obligations of the entity obligated to withhold.

  • If there was income subject to withholding, the tax due would already have had to be remitted to the Respondent by the entity obligated to withhold.

  • And in accordance with articles 20 and 28 of the LGT, and article 103, no. 1 of the CIRS, it would be to that entity, solely and exclusively that, as tax substitute, the tax would be exigible.

  • The Respondent could not present a basis of this nature for the assessment, as it knows from consultation of its system that no income was reported to it as of foreign source and subject to withholding in Portugal.

  • The obligation to provide reasons is cross-cutting – and the notified assessment was grounded and sustained based on the need to declare in the correct field (422) the income received by the Claimant and declared by it in field 407, which was informed was not adequate.

  • Although the Respondent alleges in the arbitral proceeding the supposed receipt of income from a foreign source that should have been subject to withholding in Portugal, no element is indicated or presented to identify the debtor thereof, the entity obligated to withhold, the origin of the income to be taxed or its nature.

  • Indeed, the alleged income is indicated as dividends or profits, which implies an imprecision incompatible with the duty to provide reasons.

  • Therefore, also in the new interpretation of the facts presented by the Respondent, the reasoning is legally inadmissible, and the assessment should be judged illegal.

  • For a good analysis of the controversial issue, the legal rule regarding the burden of proof and the value of declarations produced in the context of a tax proceeding is relevant.

  • Article 74 of the LGT provides that the burden of proving the facts constituting the rights of the tax administration or taxpayers falls on whoever invokes them.

  • On the other hand, according to article 75 LGT, declarations presented in accordance with the law are presumed to be true and made in good faith.

  • The two rules should be articulated with each other, with a general principle of in dubio contra fiscum (benefit of the doubt against the tax authority) applying as a rule;

  • Thus, having the Claimant submitted a substitute declaration in accordance with applicable law, it was incumbent upon the tax administration to prove that the Claimant's income tax return did not correspond to reality.

  • Such a burden was not fulfilled.

  • By asserting that it is incumbent upon the Claimant to prove that it did not earn the income imputable to it, the Respondent violates the provisions of articles 74 and 75 LGT.

  • The Respondent intends to apply to alleged income subject to withholding at source in Portugal the probative value provided for in article 76, no. 1 and 4 LGT.

  • However, this rule only applies to information provided under international conventions for mutual assistance to which the Portuguese State is bound.

  • And even if it applied, it would always be prejudiced by the presentation of proof to the contrary, as extensively submitted by the Claimant.

  • In the face of evidence to the contrary, the Respondent cannot base an additional assessment solely on information received from foreign authorities, which needs to be duly reasoned and based on criteria and may not meet the requirements necessary to assign the necessary probative value.

Respondent's Arguments

In its arguments, the Respondent argues, with relevance to the decision:

  • In a first Personal Income Tax Form 3 declaration (hereinafter DRM 3), of 06-05-2013, the Claimant declared in Field 407 (Dividends or profits – with withholding in Portugal) of Table 4 of annex J income in the amount of € 84,907.22.

  • By official letter no. … of 04-10-2016, the Claimant was notified by the AT that "according to the information transmitted to us, under that Directive, by the State/Country/territory Switzerland, the taxpayer A earned in the year 2012 interest income in the amount of € 88,622.80, which were not indicated in the Personal Income Tax Form 3 declaration, so we will proceed to include them in table 4 of annex J of said income tax return".

  • The notification did not indicate which entity was the payer.

  • The Claimant fails to prove what is alleged in articles 11 to 15 and 17 to 19, with respect to conversations with official D…, in the same sense as the Respondent had already ruled in the context of rejecting the gracious complaint: "... since what is alleged is not proven, it cannot be taken into consideration in its favor".

  • Faced with the AT notification, the Claimant, on 12-10-2016, presents a substitute DRM 3, in which it removes the income from Field 407 and adds the income in the amount of € 88,622.80 to field 422 – Income from Savings Directive no. 2003/48/CE – Remaining countries not covered by the transition period.

  • Reiterating article 10 of the Response "on 14-11-2016 the AT's services proceeded to issue an official income tax return in which they listed the income earned in field 407 and in field 422, which resulted in the assessment under challenge", that is in the official declaration the AT listed the income in the amount of € 84,907.22 in Field 407 (Dividends or profits – with withholding in Portugal), which the Claimant had withdrawn in the substitute DRM 3, as well as the interest income in the amount of € 88,622.80 in Field 422 – Income from Savings Directive no. 2003/48/CE – Remaining countries not covered by the transition period.

  • Subsequently, the Claimant filed a gracious complaint to which the case number …2016… was assigned.

  • As appears from the gracious complaint filed by the Claimant, it assumes, without understanding on what basis, that "the source of the 88,622.80 is from Banque B… (Suisse) SA".

  • Having analyzed document 1, we find that from the information exchange it results that the interest income in the amount of € 88,622.80 originated from C… (Suisse) SA (CHF…) and from Banque B… (Suisse) SA (only € 89.00).

  • Now, neither in the context of the gracious complaint, nor in the context of arbitration, does the Claimant contest the AT's correction, through which it reintroduces the amount of € 84,907.22 in Field 407, that which provides for dividends or profits with withholding in Portugal.

  • In reality, what the Claimant contests is the amount of € 88,622.80 which it itself added to Field 422, in its substitute DRM 3: "I now received a new notification and tax assessment, which I contest, in which the AT informs me that the amounts referred to above are added to me because the source of the 88,622.80 euros are from Banque B… (Suisse) SA from which I obtained no income whatsoever".

  • It should be clarified that, at no point in the case files does the Claimant succeed in proving that the AT informed it that the source of the € 88,622.80 is from Banque B… (Suisse) SA.

  • As appears from the gracious complaint, the Claimant is contesting the interest income in the amount of € 88,622.80 (Field 422), and not the dividends or profits income in the amount of € 84,907.22 in Field 407.

  • For this very reason the Respondent argued in the context of the response, cf. article 9, that "However, what was at issue was not an incorrect classification of the income, but rather an omission in the declaration of income, in the aforementioned annex J of the Personal Income Tax Form 3, of 2012".

  • Now, since the amounts of interest income (€ 88,622.80 – Field 422) originated from an information exchange with the Swiss tax authorities, the AT decided, in the context of the gracious complaint that "since what is alleged is not proven, it cannot be taken into consideration in its favor".

  • And the AT clarified: "Indeed, the taxpayer presents no declaration issued by the Swiss tax authority (original) or authenticated document in which the income obtained (its nature), the amount of income obtained, as well as, if applicable, the tax paid abroad" are specified.

  • And it is understood that it should be so, as if the information of the interest income originated in an information exchange with the Swiss tax authorities, article 76, no. 1 and no. 4 of the LGT provides, that

"1 – Information provided by tax inspection has probative value when reasoned and based on objective criteria, in accordance with the law.

(...)

4 – Covered by no. 1 is information provided by foreign tax administrations under international conventions for mutual assistance to which the Portuguese State is bound, without prejudice to proof to the contrary by the taxpayer or interested party."

  • Such "declaration issued by the Swiss tax authority" would clarify and elucidate the totality of the income obtained by the Claimant in Switzerland, regardless of its origin and/or nature, however, it opted not to make this proof, or even to take steps to obtain it.

  • Therefore, the Claimant could never call into question the correction referring to interest income in the amount of € 88,622.80 – Field 422, based on mere bank statement, nor could the AT accept such a document as sufficient proof in the face of the information resulting from the information exchange provided by the Swiss tax authorities.

  • As is easily concluded, the Respondent's arguments in no way comport with "different versions", or "a second version of the facts" as the Claimant accuses in the context of arguments.

  • And it should also be said, with respect to articles 36 et seq. of the arguments, that the Respondent was correct, in the context of the Response, to clarify the case files that: (cf. articles 33 to 37)

«when the Claimant submitted a substitute declaration to include the aforementioned interest income obtained in Switzerland, in field 422, of annex J of the Personal Income Tax Form 3 of 2012, the AT accepted such declaration, as it was in accordance with the information provided by the Swiss tax authorities.

The same did not occur with respect to the fact of having withdrawn the income of dividends or profits, with withholding in Portugal.

Now, having analyzed the Claimant's prior administrative petition as well as the gracious complaint, it in no way denies that it earned the aforementioned income of dividends or profits with withholding in Portugal.

Indeed, it even reaffirms that it received this income, in the context of the gracious complaint, by mentioning that the same originated from "C… declared in accordance with the information from that institution in the amount € 84,907.22 field 407", as on page 10 of the case file.

Therefore, the Claimant could never have altered the income tax return in the manner in which it did.»

  • And when the Respondent states at the end of this excerpt that "the Claimant could never have altered the income tax return in the manner in which it did" it refers to the fact that the Claimant withdrew the income from field 407.

  • To clarify, if the Claimant had merely limited itself to adding the interest income in the amount of € 88,622.80 to Field 422, as notified for that purpose, there would be no need for the AT to officially correct the substitute DRM 3 in the manner in which it did, that is, to add the income initially declared by the Claimant in the amount € 84,907.22 to field 407 of its initial DRM 3.

  • For this reason, all that has been expedited in the context of arguments by the Claimant, in its articles 66 to 97, should be considered unfounded, insofar as such arguments constitute a reversal of the burden of proof without any legal basis, and because it is based solely and exclusively on a biased interpretation of a doctrinal article without any legal support.

  • Moreover, in view of what was alleged by the Claimant in its articles 88 et seq., we remind the learned arbitral tribunal that the Respondent, having learned of the income of "interest" earned by the Claimant, through official information transmitted by the Swiss tax authorities via the Information Exchange, the Respondent did not merely proceed to correct the Claimant's income "tout court" as it appears to allege.

  • In fact the Respondent, following the legal procedures, always gave the Claimant the possibility to exercise the right of contradiction with respect to the information obtained from the Swiss tax authorities, which it failed to prove.

  • The Respondent also informed the Claimant, in the context of the exercise of prior hearing (of the gracious complaint), with a view to ascertaining the material truth, that "Indeed, the taxpayer presents no declaration issued by the Swiss tax authority (original) or authenticated document in which the income obtained (its nature), the amount of income obtained, as well as, if applicable, the tax paid abroad" are specified.

  • Now, as for article 52 et seq. of the arguments, there we truly encounter "alternative narratives", "different versions", or "a second version of the facts", in relation to the Claimant's defense.

  • Having never the Claimant questioned and/or complained to the AT, in the administrative and/or arbitral context, as to the amounts entered in field 407, in the context of official correction, it now remembered, after clarified in the case files by the Respondent, in the context of the Response, to call into question that same correction.

  • Now, all that is stated in the arguments from article 52 to 65 is "ex novo" and constitutes alteration and/or expansion of the cause of action.

  • As follows from the provisions of articles 264 and 265, both of the Code of Civil Procedure (CPC), in the version given by Law 41/2013, of 26 June:

«Article 264 – Alteration of the claim and cause of action by agreement

With the agreement of the parties, the claim and cause of action may be altered or expanded at any time, in first or second instance, unless the alteration or expansion would inconveniently disturb the instruction, discussion and judgment of the case.

Article 265 – Alteration of the claim and cause of action in the absence of agreement

1 – In the absence of agreement, the cause of action can only be altered or expanded as a result of confession made by the defendant and accepted by the plaintiff, with the alteration or expansion to be made within 10 days from acceptance.

2 – The plaintiff may, at any time, reduce the claim and may expand it until the end of the discussion in first instance if the expansion is the development or consequence of the original claim.

3 – If the modification of the claim is made at the final hearing, it shall be recorded in the respective minutes.

4 – The application for compulsory monetary penalty, under no. 1 of article 829-A of the Civil Code, may be deduced under the terms of no. 2.

5 – In indemnification actions based on civil liability, the plaintiff may request, until the end of the final hearing in first instance, the condemnation of the defendant under the terms provided for in article 567 of the Civil Code, even if initially he requested the condemnation thereof in a fixed sum.

6 – Simultaneous modification of the claim and cause of action is permitted provided that it does not imply convolution to a legal relationship other than the one in question.»

  • It is clearly and evidently apparent that there is no legal basis for the Claimant to expand the cause of action, as in accordance with the CPC it is only permitted to complement the cause of action, the legislator having only enshrined the alteration and modification of the cause of action, but only if effected by agreement of the parties or by confession of the Defendant and accepted by the plaintiff.

  • In the present case no alteration and/or modification is possible, the presuppositions upon which it depends not being verified, that is, agreement or confession.

  • Therefore, it is the Respondent's understanding that what was stated herein should be rejected as lacking legal basis, and for this purpose what is alleged should be considered as unwritten and inadmissible for purposes of rendering a decision.

  • Given the foregoing, the Respondent concludes for the dismissal of everything petitioned by the Claimant in the arbitral context, as it had done in the Response.

II. CASE MANAGEMENT

The single Arbitral Tribunal was properly constituted on 31-07-2017, with the Arbitrator designated by the Deontological Council of CAAD, all respective legal and regulatory formalities having been fulfilled (articles 11, no. 1, subparagraphs a) and b) of the RJAT and articles 6 and 7 of CAAD's Deontological Code), and is competent ratione materiae, in conformity with article 2 of the RJAT.

The Parties have legal standing and capacity and are properly represented.

No procedural nullities were identified.

III. ISSUES TO BE DECIDED

The issues to be decided in this case are:

  • Whether the reasoning for the rejection of the gracious complaint is valid and such as to support the respective decision;

  • Whether the act of additional assessment issued on the Claimant's 2012 income meets the legal requirements relating to the reasoning of the tax act.

IV – FINDINGS OF FACT AND CONCLUSIONS OF FACT

FINDINGS OF FACT

The following are the relevant findings of fact considered material to the decision of the case:

1st Finding: The Claimant submitted an income tax return for the year 2012, in which it entered, in table 407 ("dividends or profits with withholding in Portugal") of annex J (Income obtained abroad), the amount of 84,907.22 euros;

2nd Finding: The Claimant was notified, for the exercise of the right to prior hearing, of a draft decision of amendments to be made to the income tax return for the year 2012;

3rd Finding: In the reasoning of this draft decision, it was stated that:

  • The amendments consisted of including, in the return, interest income in the amount of 88,622.80 euros, which, according to information transmitted by the Swiss State, the Claimant had earned in the year 2012;

  • This amount should be included in field 422 ("income from Savings Directive no. 2003/48/CE") of annex J;

  • If the Claimant did not proceed, by the deadline for exercising the right to prior hearing, itself, to the amendments specified, an assessment would be issued correcting the existing irregularities.

4th Finding: On 12-10-2016, the Claimant submitted a substitute Personal Income Tax declaration, in which, in relation to the initial declaration, the amount of 84,907.22 euros was removed from field 407 of annex J and the amount of 88,622.80 was added in field 422 of annex J;

5th Finding: The Claimant was notified of an additional Personal Income Tax assessment relating to 2012 income, issued on 15-11-2016, in which neither the amount of 88,622.80 euros, nor the amount of 84,907.22 euros appears.

6th Finding: The Claimant filed a gracious complaint of the aforementioned additional assessment, on 28-11-2016.

7th Finding: In the gracious complaint, the Claimant stated:

"On 16/11/2016 I received a notification (DF Lisboa … 04.10.2016) in which I was notified that I had failed to declare income obtained in Switzerland in the amount of 88,622.80 euros in field 422. When I contacted official D…, where I said I only had income from C… declared in accordance with the information from that institution in the amount of 84,907.22 field 407. I was informed that given that the value in the AT's possession is the correct one, I would have to make a substitute declaration correcting the amount and the field. I now received a new notification and tax assessment, which I contest, in which the AT informs me that the amounts referred to above are added to me because the source of the 88,622.80 are from Banco B… (Suisse) SA from which I obtained no income whatsoever. I am at that institution merely the representative of my mother, taxpayer …, - E…, she being the sole holder of that income, and having declared that income in her Form 3 declaration and paid the respective tax.

Thus, having not obtained this income, as it has already been declared by the taxpayer who obtained it and the respective tax paid, I hereby request that assessment 2016… in my name be annulled and my substitute declaration annulled, since the true one was the one sent on 06/05/2013".

8th Finding: On 21-02-2017, the gracious complaint was rejected, with the following reasoning:

"Following analysis of the case files, it is found that, pursuant to no. 1 of article 74 of the General Tax Law, the burden of proof of facts constituting the rights of taxpayers falls on them, so that since what is alleged is not proven it cannot be taken into consideration in their favor. Indeed, the taxpayer presents no declaration issued by the Swiss tax authority (Original) or authenticated document in which the income obtained (its nature), the amount of income obtained, as well as, if applicable, the tax paid abroad are specified. Despite identifying his mother, alleging to be his representative, he does not prove this representation, and the declaration identified (that of his mother) does not contain in table 4, field 422 of Annex J, any amount".

V – REASONING

Pursuant to article 65, no. 4 of the Personal Income Tax Code (CIRS), the Tax and Customs Authority may proceed to alter the elements declared by taxpayers whenever corrections must be made arising from errors evident in the declarations themselves, from omissions therein or corrections arising from divergence in the classification of acts, facts or documents with relevance to the assessment of the tax.

Having analyzed the entire procedure which gave rise to the contested assessment, beginning with the notification for exercise of draft amendments to the income tax return, it is found that, initially, the Tax and Customs Authority considered that the Claimant had omitted certain income in its 2012 income tax return.

Such income, as appears literally from the notification of the same draft, consisted of "interest", in the amount of 88,622.80 euros, which should – according to the Respondent – be included in field 422 ("income from Savings Directive no. 2003/48/CE") of annex J (Income obtained abroad).

Therefore the Respondent considered there to exist, in the first income tax return submitted, an omission of interest obtained abroad, more specifically in Switzerland, as expressly stated in the notification of the draft amendments.

In accordance with article 60, no. 1, subparagraph a) of the General Tax Law (LGT), combined with article 121, no. 1 of the Administrative Procedure Code, the decision to "alter the income tax return", insofar as it is a decision that determines a tax assessment, must be notified to the taxpayer in the draft stage, to afford that taxpayer the exercise of the right to prior hearing.

This is what occurred.

In the notification for exercise of prior hearing, it was stated to the Claimant that it could pronounce itself on the draft amendments. But it was also stated that, alternatively, the Claimant could proceed to submit a substitute declaration, with the amendments determined by the Respondent.

The Claimant, based on error, it is true, as to the reasons underlying the amendments determined, proceeded to submit a substitute declaration, including in it the income that the Respondent intended should be included, and in the field indicated by it.

It is, indeed, evident, from analysis of the Claimant's complaint, that this party, upon submitting the substitute declaration, was convinced that what was at issue was an incorrect classification and quantification of the capital income earned by it in Switzerland.

The Claimant, upon submitting the substitute declaration, acted convinced that, first, it had indicated its capital income from Swiss source incorrectly in field 407 of annex J, when the correct field for this income was field 422 of the same annex; and that, second, the tax administration attributed to its capital income from Switzerland the value of 88,622.80 euros, when it had indicated the amount of 84,907.22 euros.

It is, therefore, evident that the Claimant did not understand what was at issue in the draft amendments notified to it for prior hearing, and even less so their grounds.

It is also true that, in this notification for prior hearing, the Tax and Customs Authority did not inform the Claimant about the identity of the financial institutions from which the income that it intended to impute came. And it happened, by coincidence, that, in addition to the income that the Tax and Customs Authority intended to impute, the Claimant had other income from Swiss financial institutions.

This coincidence gave rise to an equivocation.

But this equivocation would have been avoided if the Tax and Customs Authority had, as it was incumbent upon it, in the notification of the draft amendments, informed as to the entities from which the income to be imputed came. Which it did not do, though it could easily have done so.

Hence, at the same time that, in the substitute declaration, it entered the amount indicated by the tax administration in the field indicated, the Claimant removed another amount, from another field of the declaration.

In light of this procedure, the Respondent issued a final assessment, which it notified to the Claimant.

However, the Tax and Customs Authority could not proceed to assessment, without notifying the Claimant of a new draft of amendments.

In fact, this involved a new declaration, which bears the presumption of veracity, in accordance with article 75 of the General Tax Law, and what the Tax and Customs Authority did was to set aside this presumption, altering the data declared by the Claimant, without expressing any reasoning or giving the Claimant the possibility to pronounce itself.

In this assessment, the Respondent proceeded to alter the substitute declaration in the meantime presented by the Claimant.

This conclusion is drawn, only indirectly, from the amount of tax assessed, since an increase in taxable income from 84,907.22 euros to 88,622.80 euros could never determine an additional tax to be paid in the amount of 24,241.89 euros.

However, the assessment notified to the Claimant and its respective reasoning do not allow understanding with certainty which alterations were made.

In this final assessment, insofar as it is based on alterations that had not been previously communicated to the Claimant, it was necessary, at minimum and since the option was to proceed to a final assessment without prior hearing, that these be explained in the reasoning for the act, so as to allow the Claimant to exercise its rights of defense, in accordance with article 268 of the Constitution of the Portuguese Republic, article 152 of the Administrative Procedure Code (CPA) and article 77 of the LGT.

Now, this did not occur. The ATA never explained, at any point, which alterations to the substitute declaration formed the basis of the assessment.

Indeed, one cannot say that this notification contains reasoning.

The assessment is hermetic and unintelligible to an ordinary citizen.

With this, the Respondent violated the duty to provide reasons, enshrined in article 268 of the Constitution of the Portuguese Republic, article 152 of the Administrative Procedure Code (CPA) and article 77 of the LGT, affecting the act with the defect of lack of reasoning.

Nevertheless, and despite the lack of reasoning of the assessment, which would have allowed it to understand the reasons for the tax administration's position and to contest the act based on them, the Claimant, based on what it conjectured were the reasons for the tax administration, filed a gracious complaint.

In the gracious complaint, the Claimant, without being in possession of the reasons that motivated the act, as it should and was supposed to be, made clear that it had not understood what the origin of the income being imputed to it was.

In the complaint, the Claimant raises the possibility of being taxed on income which its mother was the true and sole holder of. Evidently, the Claimant did not have to raise any hypothesis. The Claimant was faced with a defect of lack of reasoning in the act. It could, with full propriety, have used the remedy provided for in article 37 of the Tax Procedure Code (CPPT).

But taxpayers do not have to know all the intricacies of tax law to deal with their matters with the tax administration.

Furthermore, it was the tax administration that had to clearly state which income was being imputed to the Claimant, which it did not do.

The Claimant, in the gracious complaint, expressed, in a confused manner, its ignorance as to which income was being imputed to it. But the gracious complaint is governed by the principles of simplicity of terms and informality, in accordance with article 69 of the CPPT. The tax administration cannot, all the more so having flagrantly failed in its duty to provide reasons, expect that taxpayers be adept at handling tax procedure rules.

In any event, it was clear, based on the gracious complaint, that the Claimant was ignorant as to which income was being imputed to it.

Given the evident fact that the Claimant was ignorant, for reasons attributable to the tax administration itself, due to a violation of the duty to provide reasons, of which income was being imputed to it, it was incumbent upon the Respondent, by supplementing – on the material plane if not the formal plane, as the primary act would continue to suffer from the defect of lack of reasoning – its earlier failure to fulfill the duty to provide reasons, to clarify the taxpayer as to which alterations had been made to the substitute declaration, and which income was being imputed to the Claimant, thereby providing reasoning for its decision to maintain the contested assessment act.

This would be the only valid reasoning for the decision to maintain the contested act.

A response regarding the extemporaneous and conjectural positions of the Claimant on the hypothetical origin of the imputed and taxed income, making considerations about the lack of proof and reasoning for these same conjectures, when such conjectures had, from the outset, no relevance to the decision of the controversial issue, is not adequate reasoning for the decision to maintain the contested act.

It is, as the Claimant alleges, an evasive stance that leads the taxpayer to become entangled in administrative procedures, for not having the information that would allow it to contest objectively and effectively the assessment. The Tax and Customs Authority cannot avail itself of the ignorance which it itself created in the Claimant.

Terms in which it must be concluded that the (directly contested) decision on the gracious complaint is illegal, due to lack of material reasoning, insofar as the reasoning explained is not such as to support the same decision. Namely, it does not state, in that reasoning, clearly, which income is being imputed to the taxpayer and taxed, which was the minimum required.

In the same manner, and also for the reasons already developed, it must be concluded that the assessment act indirectly contested is illegal due to lack of reasoning, this time formal, insofar as the notification of the act does not contain, in truth, any reasoning, however succinct.

The Claimant argues the lack of reasoning of the assessment act in article 62 of the initial petition, so this defect is included in the cause of action.

Being true that, among the defects that lead to annulment of the contested act, priority should be given to defects relating to its internal or material legality, to the detriment of defects relating to its external or merely formal legality, so as to promote the issuance of rulings on the merits of the claims formulated, in accordance with article 7 of the Code of Procedure in Administrative Courts, there are cases in which this is not possible.

In the present case, the arbitral tribunal finds itself unable to rule on the merits of the contested acts, precisely because their lack of reasoning does not allow knowing which alterations were made to the declaration (substitute) submitted by the Claimant, which income was imputed to it and much less on what bases such income was imputed to the Claimant.

VI – ASSESSMENT OF CLAIMANT'S REQUEST FOR CONDEMNATION OF RESPONDENT FOR BAD FAITH LITIGATION

In a request dated 20-12-2017, the Claimant accuses the Respondent of bad faith litigation and asks the Tribunal to condemn it on this basis.

Article 542 of the CPC provides:

2 - A litigant acts in bad faith who, with intent or gross negligence:

a) Has advanced a claim or defense whose lack of merit should not have been ignored;

b) Has altered the truth of facts or omitted facts relevant to the decision of the case;

c) Has committed a serious omission of the duty to cooperate;

d) Has made of the process or of the procedural means a manifestly reprehensible use, with the aim of achieving an illegal objective, preventing the discovery of truth, obstructing the administration of justice or unduly delaying the finality of the decision.

In the present case, none of these conducts was demonstrated, nor did the Claimant make an effort to specify and demonstrate that any such conduct occurred.

It is true that the entire gracious complaint procedure that precedes and follows the official assessment is marked by an "evasive" attitude of the Respondent, which is the opposite of "cooperation", but this evasive attitude manifests itself in the administrative procedure and not within the arbitral process.

Thus, it is considered not proven any prerequisite for condemnation of the Respondent under article 542 of the CPC.

VII. DECISION

For the reasons stated, it is held:

  1. The request to annul the decision rejecting the gracious complaint filed by the Claimant before the Respondent, to which the case number …2016… was assigned, having as its object the Personal Income Tax assessment no. 2016…, is GRANTED, due to the defect of lack of reasoning;

  2. The request to annul the Personal Income Tax assessment no. 2016… is GRANTED, due to the defect of lack of reasoning.

The Respondent is condemned, pursuant to article 24, no. 1 subparagraph b) of the RJAT, and article 100 of the LGT, to perform all acts necessary to restore the situation that would exist if the annulled act had not been performed.

Value of Economic Benefit of the Proceeding

The value of the economic benefit of the proceeding is fixed at 24,241.89 euros.

Costs

In accordance with article 22, no. 4, of the RJAT, the amount of costs is fixed at 1,530.00 euros, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Respondent.

Let this arbitral decision be registered and notified to the Parties.

Lisbon, Center for Administrative Arbitration, 31 January 2018

The Arbitrator

(Nina Aguiar)

Frequently Asked Questions

Automatically Created

What happens when the Portuguese Tax Authority issues an additional IRS assessment without proper substantiation?
When the Portuguese Tax Authority issues an additional IRS assessment without proper substantiation, the assessment is illegal and subject to annulment under Articles 77 and 268(3) of the Constitution. The Tax Authority must provide sufficient factual and legal grounds for any tax assessment, including clearly identifying the taxable income, its source, and the legal basis for taxation. Even when relying on information from foreign tax authorities under the EU Savings Directive, the AT must ensure the information is sufficiently detailed and accurate. If the assessment is annulled for lack of substantiation, the taxpayer is entitled to reimbursement of amounts paid or pledged as security, plus compensatory interest from the date of payment until reimbursement.
Who bears the burden of proof for income allegedly received from foreign bank accounts under Portuguese tax law?
Under Article 74(1) of the General Tax Law (LGT), the Tax Authority generally bears the burden of proof regarding the factual basis for taxation. However, Article 76(4) LGT creates a special rule for information from foreign tax administrations received under international conventions: such information has probative value without prejudice to contrary proof by the taxpayer. This means the burden shifts to the taxpayer to rebut the presumption created by foreign information. However, this shifted burden does not eliminate the Tax Authority's duty to properly substantiate assessments. The taxpayer must be given adequate information to exercise the right of defense, including identifying the specific foreign accounts, the nature of income, and amounts. If the Tax Authority cannot clarify contradictions or provide sufficient detail, the assessment may still be annulled for lack of substantiation despite the Article 76(4) presumption.
Can a taxpayer challenge an IRS additional assessment based on information received under the EU Savings Directive?
Yes, a taxpayer can challenge an additional IRS assessment based on EU Savings Directive information through CAAD arbitration under Article 2(1)(a) of the RJAT. Challenges can be based on: (1) lack of substantiation if the Tax Authority fails to provide sufficient detail about the foreign income; (2) factual errors, such as attribution of income from accounts the taxpayer does not hold; (3) incorrect classification of income type (e.g., interest vs. dividends vs. capital gains); (4) double taxation if income was already properly declared; and (5) violation of rights to prior hearing or defense. The taxpayer can present contrary evidence under Article 76(4) LGT, including bank statements, declarations from foreign institutions, or proof of non-existence of alleged accounts. The arbitral tribunal will analyze whether the assessment meets legal substantiation requirements and whether the Tax Authority properly considered the taxpayer's evidence and arguments.
What are the legal grounds for annulling an additional IRS tax assessment through arbitration at CAAD?
Legal grounds for annulling an additional IRS assessment through CAAD arbitration include: (1) violation of Article 77 LGT requiring substantiation of tax acts, particularly if the assessment lacks clarity on factual basis or legal grounds; (2) violation of the right to prior hearing under Article 60 LGT if the taxpayer was not properly notified or given opportunity to respond; (3) error in factual determination, such as attributing income from non-existent accounts or misidentifying income nature; (4) violation of Article 74 LGT if the Tax Authority failed to meet its burden of proof; (5) mathematical or calculation errors in determining taxable income; (6) violation of constitutional principles including legal certainty and proportionality; and (7) procedural defects in assessment issuance or in deciding gracious complaints. The annulment can be total or partial depending on which elements of the assessment are defective. CAAD applies full judicial review to both factual and legal aspects of challenged assessments.
Is the Tax Authority required to reimburse guarantees and pay compensatory interest after an unlawful assessment is annulled?
Yes, under Article 100 of the Tax Benefits Statute (EBF) and Article 43(1) of the LGT, when an assessment is annulled as unlawful, the Tax Authority is required to: (1) reimburse any amounts paid by the taxpayer, including amounts pledged as security or bank guarantees provided to suspend enforcement; and (2) pay compensatory interest calculated from the date of payment or pledge until the date of actual reimbursement. Compensatory interest is calculated at the legal rate established annually by Ministerial Order. This reimbursement obligation arises automatically from the annulment decision without requiring separate proceedings. The compensatory interest compensates the taxpayer for being deprived of funds due to an unlawful tax assessment, reflecting the principle that the State must make whole taxpayers harmed by illegal tax actions. The CAAD arbitral tribunal has jurisdiction to order both reimbursement and payment of compensatory interest as part of the arbitral decision.