Tax Residence & Withholding Tax on IRS: Double Taxation Dispute (CAAD 35/2013-T)

ARBITRAL DECISION

Case No. 35/2013 – T

Claimant: A...

Respondent: Tax Authority and Customs Authority

Subject Matter: Personal Income Tax (IRS) - Tax Residence / Withholding Tax / International Double Taxation

I - REPORT

I.1.

On 8 March 2013, A..., with tax identification number (NIF) ..., represented fiscally by B..., with NIF ..., (hereinafter the "Claimant"), filed with the Administrative Arbitration Centre (CAAD) a petition for the constitution of a singular arbitral tribunal, in accordance with the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to as "RJAT"), with a view to:

a) The annulment of the dismissal of the administrative complaint filed with the Claimant notified on 12 December 2012, through Official Letter No. ..., of 10 December 2012, whereby the refund of Personal Income Tax (IRS), in the amount of €12,074.37 (twelve thousand and seventy-four euros and thirty-seven cents), allegedly withheld in excess, relating to the year 2010, was rejected;

b) Condemning the Respondent to refund IRS, allegedly withheld in excess, in the amount of €12,074.37 (twelve thousand and seventy-four euros and thirty-seven cents).

I.2.

The petition for the constitution of the arbitral tribunal was accepted by the President of CAAD and was notified to the Tax Authority and Customs Authority (hereinafter designated as AT or "Respondent") on 11 March 2013.

I.3.

The Claimant failed to appoint an arbitrator. Thus, by decision of the President of the Deontological Board of CAAD, issued pursuant to Article 6, paragraph 1, of the RJAT, the undersigned was appointed as arbitrator to form part of the present singular arbitral tribunal, having accepted in accordance with legal provisions.

I.4.

The Tribunal was constituted on 14 May 2013, as confirmed by communication from the President of the Deontological Board of CAAD, which is attached to the case file.

I.5.

Notified for this purpose, pursuant to Article 17 of the RJAT, the AT submitted its response and attached the administrative file. For the Respondent, and on the grounds that shall be explained below, there was no withholding of IRS in excess, and therefore the petition should be fully rejected as unfounded and unproven and, consequently, the contested order dismissing the administrative complaint of the IRS assessment for the year 2010 should be maintained in its entirety.

I.6.

On 9 July 2013, at 3 p.m., the first meeting of the Tribunal was held at the headquarters of CAAD, located at Avenida Duque de Loulé, No. 72-A, in Lisbon, in accordance with Article 18 of the RJAT, and minutes thereof were recorded, which are attached to the case file. At that meeting, the parties declared they waived the presentation of briefs, and the Tribunal set 1 October 2013 as the date for the pronouncement of the final decision.

I.7.

On 23 September 2013, pursuant to paragraph 1 of Article 134 of the Civil Procedure Code (CPC), approved by Law No. 41/2013, of 26 June, applicable ex vi of Article 29, paragraph 1, subparagraph e), of the Legal Framework for Arbitration in Tax Matters (RJAT), the Tribunal ordered the notification of the Claimant to attach to the case file the Portuguese translation of documents in foreign language that were attached, fixing for this purpose a period of 15 days, and consequently rendered without effect the date previously set for the pronouncement of the arbitral decision.

I.8.

By order of 9 October 2013, the Tribunal granted the attachment to the case file of the translation of documents requested by the Claimant and granted a period of 10 days to the Respondent to comment, if it so wished.

I.9.

On 4 November 2013, the Tribunal issued an order, pursuant to Article 21, paragraph 2, of the RJAT, determining the extension by 2 months of the period for the pronouncement of the arbitral decision, counted from 14 November, the date on which six months from the date of its constitution had elapsed. On 13 January 2014, the date for the pronouncement of the arbitral decision was extended by a further 2 months.

I.10.

The Claimant supports its petition, in summary, as follows:

I.10.1.

In the year 2010, the Claimant had an employment relationship with company C..., Lda. ("C..."), which was in force from 1 January 2010 to 30 June 2010.

I.10.2.

Notwithstanding the said employment relationship, the Claimant was absent from Portugal on several occasions, both for professional and personal reasons, and therefore would not have remained in Portugal for more than 183 days in the year 2010.

I.10.3.

On 5 July 2010, the Claimant signed an employment contract with C... Trading Services Italy, s.r.l. (C... Italy) effective 1 September 2010.

I.10.4.

The Claimant registered as a tax resident in Italy on 29 June 2010 and moved, together with his family, to Italy as soon as his employment relationship with C... in Portugal ended.

I.10.5.

Notwithstanding the Claimant not meeting the conditions provided for in the IRS Code for the purpose of his qualification as an individual tax resident in Portugal, on the remuneration earned by the Claimant as a result of work performed for C... during the year 2010, in the total amount of €98,568.13, withholdings at source of IRS were made in the amount of €31,788.00.

I.10.6.

On 20 June 2012, the Claimant filed an administrative complaint requesting the refund of tax allegedly withheld in excess, in the amount of €12,074.37.

I.10.7.

On 15 November 2012, the Claimant was notified of the draft dismissal of the administrative complaint, based on the fact that it had not attached elements capable of demonstrating and proving the grounds of its claim.

I.10.8.

The Claimant exercised the right to prior hearing, in the context of which it attached to the process elements that the Tax Authority had warned had not been previously presented, thereby considering that it had proven its status as a non-resident in Portugal.

I.10.9.

Nevertheless, the administrative complaint was expressly dismissed on the grounds that the Claimant "continued to not present the requested elements, and that the current allegations are similar to those that had already been explained in the petition initially presented".

I.10.10.

From the provisions of Article 268, paragraph 3, of the Portuguese Constitution (CRP) and Article 77, paragraph 1, of the General Tax Law (LGT), the Claimant understands that it is possible to infer that the requirement of substantiation is intended to enable the administrated to formulate a conscious judgment about the advisability or not of impugning the act and functions as a guarantee of transparency and careful consideration of the action of the Tax Authority, further ensuring the necessary hierarchical and judicial control of the act, an understanding that has support in various jurisprudence that it indicates.

I.10.11.

In these terms, the Claimant understands that the substantiation must allow the interested party to learn the cognitive and evaluative path followed by the author of the decision to decide in the way he decided and not in any other, a situation that would not occur in the present case.

I.10.12.

Considering the fact that the Claimant has, in the exercise of the right to prior hearing, attached various documents that, in his view, prove his non-residence for tax purposes in Portugal, the decision could never be substantiated on the basis of the draft dismissal, rather requiring that any new dismissal of the administrative complaint deserved different substantiation, which clearly did not occur, thus also violating the provisions of Article 56, paragraph 1, of the LGT.

I.10.13.

He concludes, therefore, on this point, that the dismissal of the administrative complaint is vitiated by the defect of lack of substantiation, insofar as the same does not allow to ascertain the reason why the facts and arguments put forward by it in the exercise of the right to prior hearing do not merit acceptance by the AT, thus lacking an essential formality which is the need for substantiation by means of a brief statement of the reasons of fact and law that motivated it.

I.10.14.

As regards the substantive aspects, the Claimant understands that it cannot be considered a resident in Portugal for tax purposes, in light of the provisions of Article 16, paragraph 1, subparagraphs a) and b), and paragraph 2 of the IRS Code.

I.10.15.

On one hand, it considers to have proven that the Claimant did not remain in Portugal for a period exceeding 183 days, and therefore the requirement provided for in subparagraph a) of the aforementioned Article 16 of the IRS Code is not met, and, on the other hand, it did not have any residence in Portugal on 31 December 2010, and on that date it already resided with his family in Italy, whereby the residence requirement provided for in subparagraph b) of paragraph 1 of Article 16 of the IRS Code is also not met, insofar as on 31 December 2010, the usual residence of the Claimant was not located in Portuguese territory, but rather in Italian territory.

I.10.16.

Furthermore, it argues that, even if the Claimant had remained more than 183 days in Portuguese territory, which could have attributed to him Portuguese tax residence according to domestic legislation, the fact that the Claimant is (in that case, also) a tax resident in Italy would oblige us to resort to the Convention between the Portuguese Republic and the Italian Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter abbreviated as "CDT") to determine which State has the competence to tax him as a resident by reference to 2010 (insofar as the CDT prevails over domestic legislation, in accordance with paragraph 2 of Article 8 of the Portuguese Constitution).

I.10.17.

Indeed, paragraph 2 of Article 4 of the said CDT provides that "when (...) an individual is a resident of both Contracting States, the situation shall be resolved according to the following rules: (i) He shall be considered a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be considered a resident of the State with which his personal and economic interests are most closely connected (centre of vital interests)".

I.10.18.

Wherefore, even if the Claimant could be considered a tax resident in Portugal in accordance with Portuguese domestic legislation, the fact that he has a permanent location in Italian territory and that the centre of his vital interests is located in Italy (namely his work and his family), would determine that the Claimant be considered a tax resident in Italy.

I.10.19.

He concludes, therefore, that in 2010, the Claimant should be considered a tax resident in Italy.

I.10.20.

Nevertheless, on the remuneration earned by the Claimant as a result of work performed for C... during the year 2010, in the total amount of €98,568.13, withholdings at source of IRS were made in the amount of €31,788.00.

I.10.21.

That is, the withholding tax rate applied (approximately 32%) was based on the erroneous assumption that the Claimant was, for tax purposes, a resident of Portugal, an error confirmed also by the fact that C... included the income paid by the Claimant in its Form 10 statement and not in the Form 30 statement.

I.10.22.

As an individual non-resident for tax purposes in Portugal, the income earned by the Claimant should have been subject to withholding at source at the rate of 20%, as provided for in subparagraph a) of paragraph 4 of Article 71 of the IRS Code, in the wording in force at the date of the facts.

I.10.23.

Thus, instead of the amount of €31,788.00 withheld at source by C..., the amount of €19,713.63 (€98,568.13 x 20%) should have been withheld at source.

I.10.24.

For all these reasons, the Claimant is entitled to be refunded the difference, in the amount of €12,074.37, withheld in excess, and, consequently, the AT should be condemned to effect that restitution.

I.11.

In its Response the AT invoked, in summary, the following:

I.11.1.

The substantiation or motivation of an administrative decision has only meaning as a form of documentation of the decision-making path in order to make it possible to verify whether the Administration respected the assumptions defined in the law to justify its manner of action and whether it acted for the realization of the purposes that justified that certain powers were attributed to it.

I.11.2.

In this way, for the AT, the substantiation should serve so that the interested party may know "why this decision was made and not some other", emphasizing that this is the uniform and settled understanding of the jurisprudence, thus giving it means to impugn the decision in case it considers that it violates a right or legally protected interest.

I.11.3.

That is, basing itself on the jurisprudence contained in the Full Court Decision of the Supreme Administrative Court (STA) No. 1126/02, of 06/12/05, the Respondent argues that the substantiation "is sufficient when it allows a normal recipient to perceive the cognitive and evaluative path followed by the author of the act to make the decision, that is, when that person can know the reasons why the author of the act decided as it decided and not differently, in order to be able to trigger administrative or contentious impugnment mechanisms".

I.11.4.

For the AT, the complaint filed reveals to be deficient as to the documents proving the amount of income from the activity carried out in the service of C..., the respective deductions made and, above all, the amount of the respective withholdings at source made throughout the period in which it was providing collaboration with the company "C...", during the year 2010, and moreover in the same only contains a mere statement giving knowledge that in that year the total amount earned would have been €98,568.00, and therefore would not be capable of being granted, because there is no unequivocal proof of what is alleged, as required by Article 74 of the LGT.

I.11.5.

On the other hand, according to the tax registration of the taxpayer, the Claimant only changed his tax residence to Italy on 15 October 2010.

I.11.6.

In addition to that, within the scope of the tax procedure the documents presented by the Claimant purportedly proving his alleged residence in Italy are not written in Portuguese language, which, being mandatory, pursuant to the provisions of the CPC, did not render them relevant for the purposes of the AT's decision, having therefore correctly refrained from taking them into account in the course of the prior hearing.

I.11.7.

Taking into account the provisions of Articles 139 and 140 of the CPC, the Respondent challenges the documents written in foreign language, attached by the Claimant, which, as long as they are not properly translated, cannot be accepted as evidence, since, apparently, they were not properly legalized in accordance with the mandatory requirements under Article 540 of the CPC.

I.11.8.

On the other hand, the Respondent argues, taxpayers have the obligation to communicate their tax domicile to the tax administration, whenever they intervene or may intervene in any procedures or proceedings in the services of the tax administration or in tax courts, having 15 days to comply with that obligation, whenever there is any change in their domicile, seat or electronic mailbox (cf. paragraph 3 of Article 19 of the LGT and Article 43, paragraph 1, of the Tax Procedure and Process Code (CPPT)).

I.11.9.

And, pursuant to Article 19, paragraph 4, of the LGT, as long as that obligation is not complied with, such change of domicile by the Claimant is ineffective.

I.11.10.

Whereby, in the case at hand, the change of domicile of A. to Italy only produces effects before the AT as from 15/10/2010, that is, from the date on which it became aware of such fact.

I.11.11.

Recognizing, however, that such provision does not impose the subjection of the Claimant to IRS as a resident, the AT argues that the same is relevant for determining upon whom the burden of proof lies, as regards the question sub judice.

I.11.12.

Having in mind the provisions of Article 74, paragraph 1, of the LGT, and the doctrinal elaboration that it calls upon in support of its thesis, the Respondent understands that it was incumbent upon the Claimant to prove that, for tax purposes, he was not a resident in Portugal. And it asserts that he did not do so.

I.11.13.

Whereby it must be concluded that the Claimant was a resident in Portugal and therefore a taxpayer for IRS purposes as a tax resident in Portugal and subject to withholdings at source of the tax in that capacity.

I.11.14.

The Respondent concludes its Response as follows:

"34.

The administrative complaint was correctly decided, and is adequately substantiated.

In the year 2010 the A. was, according to the rules of the IRS Code, a resident in Portugal, where he had an employment contract between 01.01.2010 and 30.06.2010;

And having only changed his tax residence to Italy on 15.10.2010, the date from which, moreover, in accordance with the law, such modification is effective,

A date also on which, moreover, he proceeded to appoint a tax representative in Portugal.

The burden of proof of tax residence is the responsibility of the A., and some of the documents attached by him are not written in Portuguese language, and therefore cannot be admitted as such.

There is therefore no doubt whatsoever that at the date of payment of the remuneration and the making of withholdings at source, the Claimant worked and resided in Portugal, having further extended his tax residence in Portugal by an additional 3.5 months beyond the end of the employment contract, that is, from 01.01.2010 to 15.10.2010.

Now, there being no doubt whatsoever as to the location of the tax residence of the A., there is no concurrent jurisdiction between two tax systems of different countries, and therefore there is no need to proceed with the application of the said convention for the avoidance of double taxation between Portugal and Italy".

II. SANITATION OF PROCEEDINGS

The Tribunal is competent and is regularly constituted, pursuant to Articles 2, paragraph 1, subparagraph a), 5 and 6, all of the RJAT. The parties have standing and capacity, are legitimate and are legally represented, pursuant to Articles 4 and 10 of the RJAT and Article 1 of Ordinance No. 112-A/2011, of 22 March. There are no defects that invalidate the proceedings.

It is therefore incumbent to now examine the merits of the petition.

III. FINDINGS OF FACT

III.1. Probative Value of the Documents Attached by the Claimant and Challenged by the Respondent

As already mentioned, this Tribunal, pursuant to paragraph 1 of Article 134 of the CPC, approved by Law No. 41/2013, of 26 June, applicable ex vi of Article 29, paragraph 1, subparagraph e), of the RJAT, ordered the notification of the Claimant to attach to the case file the Portuguese translation of documents in foreign language that were attached.

Within the period fixed for this purpose, the Claimant attached the Portuguese translation, certified by the Solicitor ..., of documents Nos. 4 to 8, attached with the petition for arbitral pronouncement.

The Tribunal has no doubt whatsoever about the suitability of the translation and its certification, and therefore there is no reason to question its probative value.

Specifically as regards document No. 4, certificate of assignment to the Claimant of a tax identification number by the Italian authorities, in that it is a document executed by a foreign authority, the question arises as to whether the apostille of the Hague Convention of 1961 would or would not be necessary.

In line with the decisions handed down by a collective arbitral tribunal in cases No. 11/2012-T and No. 108/2012-T, both of CAAD, the jurisprudence of the Supreme Court of Justice (STJ) in its Decision of 12 July 2011, handed down in Proc. No. 987/10.5YRSLB.S1 (available for consultation at www.dgsi.pt) is accepted:

"Article 365 of the Civil Code (CC) provides:

1. Authentic documents and private documents executed in a foreign country, in accordance with the respective law, constitute proof as they would if executed in Portugal.

2. If the document is not legalized, in accordance with procedural law, and there are doubts as to its authenticity or the authenticity of its acknowledgment, its legalization may be required.

Pursuant to paragraph 1 of Article 540 of the CPC 'Authentic documents executed in a foreign country, in accordance with that country's law, shall be considered legalized provided that the signature of the public official is recognized by a Portuguese diplomatic or consular agent in the respective State and the signature of such agent is authenticated with the respective consular white seal.'

Within the scope of the Hague Convention of 5 October 1961 the legalization of the document is carried out through the apostille by the public entity that the State of origin has designated for that purpose.

In annotation to Article 365 of the Civil Code, Pires de Lima and Antunes Varela explain: 'The requirement for legalization of documents executed in a foreign country, in accordance with that country's law, was, in principle, abolished. Courts, as well as any public offices must, therefore, attribute to such documents all their probative value, independently of legalization. This, however, may become mandatory if doubts arise as to its authenticity or the authenticity of its acknowledgment' (cf. Annotated Civil Code, Vol. I, 4th ed., p. 324 and in the same sense, Decision of the STJ of 25/10/1974 – BMJ 240-199, also cited in the Decision of the STJ of 8/5/2003 – Proc. 03B1123 – in www.dgsi.pt) (In the same sense of this arrest, the Decision of the STJ, of 17/06/1998, handed down in Proc. No. 988313, with summary available in the same website).

Also on this matter write José Lebre de Freitas, A. Montalvão and Rui Pinto: 'Legalization is not indispensable for a document executed in a foreign country to constitute proof in Portugal.

Article 365 of the CC confers to such document, whether it be authentic or private, provided that it is executed in accordance with the lex loci, the same probative force that documents of the same nature executed in Portugal have; and only if there are founded doubts as to its authenticity, or the authenticity of its acknowledgment, can its legalization be required under Article 540).' (in Annotated Civil Procedure Code, Vol. 2, 2nd ed., p. 474)."

In these terms, and in line with the mentioned arbitral and STJ jurisprudence, the Tribunal also understands that the said document should be attributed the probative force conferred, in accordance with Article 371 of the Civil Code, to documents issued by the tax authorities in Portugal.

III.2. Established Facts

III.2.1.

The Claimant was an employee of company C..., Lda. ("C...") between 1 January 2010 and 30 June 2010 (there is agreement of the parties and it appears in Documents Nos. 1 and 2 attached by the Claimant and in the administrative file attached by the Respondent).

III.2.2.

The Claimant, in return for that employment relationship, earned the total amount of €98,568.13, and withholding at source of IRS was made at the rates in force for tax residents in Portugal, in the total amount of €31,788.00 (cf. Document No. 9 attached by the Claimant).

III.2.3.

On 6 June 2010, the Claimant enrolled his son D... in the English School of ..., in Italy, for the 2010/2011 academic year, and proceeded to pay the corresponding tuition fee (cf. document No. 8 attached by the Claimant).

III.2.4.

On 29 June 2010, the Italian tax authorities assigned to the Claimant a tax identification number (cf. Document No. 4 attached by the Claimant).

III.2.5.

On 5 July 2010, the Claimant signed an employment contract with C... Trading Services Italy, s.r.l. (C... Italy), with headquarters in ..., Italy, effective 1 September 2010 (cf. Document No. 6 attached by the Claimant).

III.2.6.

On 16 September 2010, C... Trading Services Italy, s.r.l. (C... Italy), the Claimant's employer, from 1 September of that year, as provided for in the contract referred to in III.2.5., leased a property located in ..., with a duration of 4 years, intended for residential use by the Claimant (cf. Document No. 7).

III.2.7.

On 15 October 2010, the Claimant notified the Portuguese tax authorities that he was no longer a tax resident in Portugal, giving as his new residence the location of the dwelling made available to him by C... Trading Services Italy, s.r.l. (C... Italy), as referred to in III.2.6., and his registration status in the Taxpayer Management and Registration System – which until that date had listed him as a resident in Portugal – was altered accordingly, also indicating the tax representative, who on that same date was appointed (cf. administrative file attached by the Respondent).

III.2.8.

On 20 June 2012, the Claimant filed administrative complaint No. ... requesting the refund of €12,074.37, for IRS allegedly withheld in excess.

III.2.9.

On 15 November 2012, the Claimant was notified of the draft dismissal of the administrative complaint, based on the fact that the Claimant had not attached supporting elements of the facts alleged.

III.2.10.

The Claimant exercised the right to prior hearing and in that context attached various documents.

III.2.11.

The administrative complaint was dismissed with the justification that the Claimant continued to not present the requested elements, "and that the current allegations are similar to those that had already been explained in the petition initially presented".

III.3. Facts Found Not to be Established

The Tribunal considers it not to have been proven that in the year 2010, the Claimant did not remain in Portugal for more than 183 days.

III.4. Substantiation of the Findings of Fact

III.4.1.

As set forth above, the established facts result from undisputed matter and demonstrated by the documents attached to the case file, as well as from the elements of the administrative file attached by the Respondent.

III.4.2.

Let us therefore focus on the fact found not to be established.

Article 16, paragraph 1, subparagraph a), of the IRS Code provides that individuals who, in the year to which the income relates, "have remained therein for more than 183 days, consecutive or non-consecutive", are residents in Portuguese territory. This is an objective criterion. As Manuel Faustino states, "once the maximum limit of 183 days of stay in Portuguese territory is reached, the acquisition of residence automatically takes effect".[1]

Without a shadow of a doubt, it was incumbent upon the Claimant to prove that such a stay did not occur. Indeed, as stated in the Decision of the STA of 18 January 2006, handed down in case No. 01102/05, "if it is proven that the taxpayer has a tax number in Portugal and resides here, it is he who bears the burden of proof that he resided in Portugal for less than 183 days", since, "we are faced with an imperative fact, and therefore the proof of such fact, pursuant to paragraph 2 of Article 342 of the Civil Code, falls upon the one against whom it is invoked".

Now, that is precisely the case in the present proceedings. The Claimant had a tax number in Portugal, and resided here, within the framework of the employment contract he maintained in the first half of 2010 with C... Portugal.

The circumstance that only on 15 October 2010 he notified of the change in his tax domicile, cannot, obviously, ground any taxation, nor can it substitute the rules that define tax residence. The "ineffectiveness" of the change of domicile (and note that it says "domicile" and not residence) referred to in paragraph 4 of Article 19 of the LGT does not have – by itself – the scope of converting the taxpayer into a resident for tax purposes, if the same makes proof to the contrary.

Indeed, in seeking to demonstrate that document attached as No. 3 proves that he did not remain in Portugal for more than 183 days, the Claimant – and rightly so – accepted that it was his burden of proof on that point.

It happens, however, that such document – a print of the Star Alliance website – in no way constitutes proof of what is invoked. Curiously, the document was not subject to translation and should have been. But even if it had been, it would always be clearly insufficient proof that the Claimant in 2010 did not remain in Portugal for more than 183 days.

Indeed, the law speaks of days consecutive or non-consecutive. Now, we do not know, for example, whether the Claimant in the second half of 2010 remained more days in Portugal, on vacation or otherwise, thus compensating for the absences he claims to have had in the first half, but which are in no way proven.

This is, undoubtedly, difficult evidence to provide. We acknowledge, as Manuel Faustino states, that "the maintenance of the criterion of the 183 days of stay, consecutive or non-consecutive, in Portuguese territory, proves increasingly problematic in terms of effective control, since the elimination of the passport, and the stamps that were placed therein upon entry and exit from national territory, for circulation in the European Union ended the easiest and most credible means of proof, both from the point of view of the tax authorities and from the point of view of those affected themselves. The counting of the 183 days is also itself problematic, since our legislation is completely silent on how sporadic absences should be considered (e.g., weekend trips to the country of 'residence'), absences for reasons of proven illness or absence from national territory for the enjoyment of vacation".[2]

But in light of the rules in force, it is clear that the Claimant did not prove that he did not reside in Portugal for more than 183 days.

IV. LEGAL ISSUES

IV.1.

The Claimant invokes two orders of defects in the contested act:

i) Formal, by the pretermission of essential formalities of the act of dismissal of the administrative complaint, due to lack of substantiation; and

ii) Substantive, due to violation of law in that he cannot be considered a tax resident in Portugal in the year 2010, in light of any of the criteria provided for in Article 16 of the IRS Code or, admitting that he could have been attributed tax residence in Portugal for being considered to have remained in national territory for more than 183 days, due to violation of an international convention, more specifically Article 4, paragraph 2, of the CDT (which prevails over domestic legislation by virtue of the provisions of Article 8, paragraph 2, of the CRP), which would determine, given the fact that the Claimant has a permanent location in Italian territory and that the centre of his vital interests is located in Italy (namely his work and his family), that he be considered an Italian tax resident.

IV.2.

Thus, a first reference must be made to the order of examination of the defects invoked. Indeed, having in mind the provisions of Article 124, paragraph 2, of the CPPT, applicable here by virtue of the provisions of Article 29, paragraph 1, subparagraph a), of the RJAT, the Tribunal understands that it should first examine the substantive defects since that order is the one that ensures more effective protection of the taxpayer's rights. In fact, the annulment of the contested act due to lack of substantiation does not prevent its renewal if that defect is remedied. Should it be understood that the contested act violated the law in substantive terms, such renewal will not be possible. In any event, moreover, given the claim for condemnation of the AT to refund the allegedly withheld tax in excess, the substantive defects invoked would in any case have to be examined.[3]

IV.3. On Substantive Defects

IV.3.1.

As already mentioned, the Claimant failed to prove that he did not remain in Portugal for more than 183 days in the year 2010 and, in that way, should be considered a tax resident in Portugal in light of the provisions of Article 16, paragraph 1, subparagraph a), of the IRS Code.

IV.3.2.

The resort to the CDT for the purposes of resolving the present dispute is only justified, as indeed the Claimant and Respondent recognize, if it is considered that the Claimant, in the year 2010, was also considered a tax resident in Italy, in which case we would have to apply the rules of the Convention, namely paragraph 2 of its Article 4.

It is true that the Claimant provided proof of some important indications: the employment contract entered into with an entity with headquarters in Italy, effective 1 September 2010, the lease contract entered into by his employer, under which a dwelling is made available to the Claimant, as well as the enrollment of his son in a school located in the city of ....

There is lacking, however, proof that the Italian authorities considered and treated the Claimant as a resident in Italy.

The Claimant attached – it is true – unequivocal proof that the Italian tax authorities assigned to him a tax identification number. But that is not sufficient to prove that he is a tax resident in Italy.

This could have been achieved, for example, by attaching the certificate of tax residence in Italy or any other proof that unequivocally resulted in the Italian authorities, in the year 2010, under Italian law, considering him as such. In fact, it is the Claimant himself who, with respect to Portugal, notwithstanding the tax identification number that was assigned to him, understands that he should not be considered a tax resident in Portugal, whereby – it must be agreed – the same may occur with respect to his situation in Italy.

It is admitted that this may have happened. But, in the view of the Tribunal, there is no conclusive proof of this situation in the case file.

As Rui Duarte Morais points out,[4] "if taxation as a resident has occurred in both States, one must resort to the tiebreaker rules provided for in the convention itself (...)".

Now, that assumption is not shown to be verified in the present case file since it has not been proven that Italy taxed the Claimant as a resident in that country.[5]

Therefore, the Claimant not having provided sufficient proof that in the year 2010 he was also considered a tax resident in Italy, a condition indispensable for us to proceed to the application of the rules of the CDT, there is no place for the analysis of the content of that Convention.

Thus, with the elements available in the case file, the only conclusion that can be reached is that the withholding at source of IRS partially contested should not be criticized for having treated the Claimant as a tax resident in Portugal, there being, therefore, no excess to be refunded, thus requiring the acquittal of the Respondent as to the second petition.

IV.4. On the Pretermission of Essential Formalities

IV.4.1.

On 20 June 2012, the Claimant filed administrative complaint No. ... requesting the refund of €12,074.37, for IRS allegedly withheld in excess.

IV.4.2.

On 15 November 2012, the Claimant was notified of the draft dismissal of the administrative complaint, based on the fact that the Claimant had not attached elements capable of demonstrating and proving the grounds of its allegations, stating that it was incumbent upon the Claimant to "prove unequivocally what it asserts, pursuant to paragraph 1 of Article 74 of the General Tax Law" (cf. point VI. 7. of the draft dismissal), clarifying that the Claimant should be notified to exercise the right to prior hearing provided for in Article 60 of the LGT, "taking the opportunity to attach the supporting documents (...) upon which the granting or not of the petition filed in the course of the present administrative complaint proceedings will depend" (cf. point VII.).

IV.4.3.

Upon examination of the case file, it is verified that the Claimant exercised the right to prior hearing and in that context attached various documents, some of which written in foreign language.

IV.4.4.

In this regard, it is important to note the content of Articles 11 and 12 of the Respondent's Response. It states, in fact:

"11.

In addition, in the course of the tax procedure the documents presented by the A. purportedly evidencing his alleged residence in Italy are not written in Portuguese language, which, being mandatory, under the provisions of the Civil Procedure Code (CPC), would not render them relevant for the purposes of the AT's decision.

Concluding, in this way, that the AT rightly decided when it did not take into consideration in the tax procedure the elements attached by the A. during the prior hearing".

IV.4.5.

That is, it is the AT itself that confirms that the elements attached by the Claimant during the prior hearing were not considered. And it presents a reason: they were not "written in Portuguese language".

IV.4.6.

It happens, however, that one will search in vain in the substantiation of the dismissal for any reference to that aspect. The only thing that is stated is that the petition was dismissed because the Claimant "continued to not present the requested elements, and that the current allegations are similar to those that had already been explained in the petition initially presented".

IV.4.7.

It is thus clear that the documents attached by the Claimant during the prior hearing, conducted under Article 60 of the LGT, were disregarded without any reason being given for this. A defect that naturally cannot be remedied during the Response to the petition for arbitral pronouncement.

IV.4.8.

The documents attached by the Claimant were new elements and should, therefore, have been subject to examination, necessarily reflected in the final order of the administrative complaint. If that were not the case, the purposes of the prior hearing procedure would be completely lost sight of.

IV.4.9.

That is, moreover, what results clearly and expressly from what is provided for in paragraph 7 of Article 60 of the LGT: "New elements raised in the hearing of taxpayers are necessarily taken into account in the substantiation of the decision".

IV.4.10.

As Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa[6] state in annotation to this provision, "the failure to examine the new factual or legal elements invoked by the interested parties shall constitute a defect of form, due to deficiency in substantiation, capable of leading to the annulment of the decision of the procedure".

IV.4.11.

In this way, by failing to pronounce on the documents attached by the Claimant during the prior hearing, the order dismissing the administrative complaint pretermitted essential formalities, suffering from a defect of form due to lack of substantiation, plainly violating the provisions of Articles 60, paragraph 7, and 77, paragraph 1, both of the LGT.

V. DECISION

In view of everything set forth above, it is decided:

a) The claim for condemnation of the Respondent to refund IRS, allegedly withheld in excess, in the amount of €12,074.37 (twelve thousand and seventy-four euros and thirty-seven cents) is wholly rejected as unfounded and unproven.

b) The contested act of dismissal of administrative complaint No. ... filed by the Claimant is annulled, due to a defect of form, as a result of lack of substantiation.

VI. Value of the Case

The value of the case is fixed at €12,074.37, pursuant to Article 97-A, paragraph 1, subparagraph a), of the CPPT, applicable by virtue of subparagraphs a) and b) of paragraph 1 of Article 29 of the RJAT and paragraph 2 of Article 3 of the Arbitration Fee Regulation for Tax Arbitration Proceedings.

VII. Arbitration Fee

The arbitration fee is fixed at €918.00, pursuant to Table I of the Arbitration Fee Regulation for Tax Arbitration Proceedings, to be paid by the Claimant and the Respondent in equal proportion of 50%, taking into account that the Claimant obtained success in only one of the petitions it filed, pursuant to Articles 12, paragraph 2, and 22, paragraph 4, both of the RJAT, and Article 4, paragraph 4, of the said Regulation.

Notify accordingly.

Lisbon, 14 March 2014

The Arbitrator,

Luís Máximo dos Santos

The present Decision follows the spelling rules prior to the Orthographic Agreement of 1990.

[1] Cf. Manuel Faustino, "Residents under Portuguese Personal Income Tax (IRS)", in Science and Technical Taxation, No. 424, July – December, 2009, p. 116.

[2] Cf. Manuel Faustino, loc. cit., p. 122.

[3] In line with the understanding adopted, cf. the Decisions of the STA of 12 July 2010, 7 June 2011 and 9 July 2011, handed down, respectively, in cases Nos. 0569/10, 0355/11 and 023/11.

[4] Cf. Rui Duarte Morais, "International Double Taxation in IRS – Notes on a Reading of Jurisprudence", in Review of Public Finance and Tax Law, year 1, No. 1, Spring, 2008, p. 115.

[5] It is true that in Document No. 5 attached by the Claimant – "Single Certificate of Dependent Work Income/Pensions", relating to the year 2010, but the document does not tell us whether the taxation of the Claimant that it reveals was effected while a resident in Italy.

[6] Cf. Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, General Tax Law – Annotated and Commented, Encontro da Escrita Publishers, Lisbon, 2012, p. 513.