CAAD 353/2017: IRS Severance Pay & Banking Sector Seniority Exemption

Process: 353/2017-T

Date: December 10, 2017

Tax Type: IRS

Summary

CAAD Process 353/2017-T addresses the taxation of severance compensation paid upon employment contract termination in Portugal's banking sector. Two taxpayers received severance payments in 2013 after terminating their employment contracts with their bank. The central dispute concerns the calculation of 'seniority' for determining the IRS exemption under Article 2(4)(b) of the Personal Income Tax Code (CIRS). The taxpayers argued that seniority should include their entire banking sector career pursuant to Clause 17 of the Banking Sector Collective Agreement (ACT), which allows cumulative counting of service time across different banking institutions. The termination agreements explicitly incorporated this interpretation, supported by two prior Central Administrative Court South decisions (2004 and 2010). The bank calculated the exemption accordingly, withholding IRS only on amounts exceeding the exemption threshold. However, the Tax Authority (AT) contested this approach in 2016, issuing additional assessments totaling €15,430.75 and €26,982.81 respectively. The AT maintained that the multiplier in Article 2(4)(b) CIRS should reflect only years of service with the specific employer paying the compensation, not total banking sector seniority. The taxpayers challenged these assessments through CAAD arbitration, seeking annulment of the additional tax liabilities and compensatory interest. The case highlights the intersection between labor law collective agreements and tax law interpretation, specifically whether instruments of collective labor regulation can define employment-related concepts imported into tax legislation. The arbitral tribunal must determine whether banking sector seniority per Clause 17 of the ACT should prevail over the Tax Authority's restrictive interpretation limiting seniority to service with a single employer.

Full Decision

ARBITRAL DECISION

PARTIES

Requesters: A… (A…), NF…, resident at Rua … nº … … - … Lisbon; and B… (B…), NF…, resident at Rua … nº…, … –… … .

Respondent: TAX AND CUSTOMS AUTHORITY (AT)

I. REPORT

a) On 31-05-2017, the Requesters filed a request with the CAAD requesting, under the Legal Regime for Arbitration in Tax Matters (RJAT), the constitution of a singular arbitral tribunal (TAS).

THE REQUEST

b) The Requesters, in coalition and combining the claims, petition for the declaration of illegality and annulment of their respective Personal Income Tax (IRS) assessments and resulting adjustments:

· in the amount of €15,430.75 (fifteen thousand four hundred and thirty euros and seventy-five cents), corresponding to assessment note no. 2017…, to the account adjustment no. 2017…, and to the compensation no. 2017…, relating to the 2013 tax year, regarding A….

· in the amount of €26,982.81 (twenty-six thousand nine hundred and eighty-two euros and eighty-one cents) corresponding to the assessment note numbered 2017…, to the account adjustment no. 2017…, and to the compensation no. 2017…, relating to the 2013 tax year, regarding B….

c) They further petition for the condemnation of the AT to reimburse the amounts paid, increased by compensatory interest, at the legal rate in force.

THE CAUSE OF ACTION

d) Both Requesters concluded with the banking institution where they worked in 2013 agreements for the revocation of dependent work contracts, which provided that their seniority would be calculated from the beginning of their activity in the banking sector, in accordance with clause 17 of the ACTV of the banking sector and not only in the banking institution where they worked at the time of the revocation of the contracts.

e) And accordingly, the parties wrote in the revocation agreement the following: "Taking into consideration the applicable terms of Clause 17 of the Collective Labour Agreements (CLA) of the Banking Sector and considering the interpretation upheld in the decisions of the Central Administrative Court South of 11 May 2004 (Case 06002/01) and, in particular, of 21 September 2010 (Case 03478/10), both parties acknowledge their agreement on the determination of the employee's seniority by counting their time of service in banking entities indicated in the aforementioned clause of the CLA, for the purposes of the provision of paragraph b) of no. 4 of article 2 of the Personal Income Tax Code, as amended by article 108 of Law no. 64-B/2011, of 30 December".

f) Following the signing of the agreements for revocation of work contracts, Requesters A… and B… received compensation in the amounts of €159,147.00 and €68,640.00, respectively.

g) In accordance with the contractual terms, the banking institution, considering article 2, number 4, paragraph b) of the CIRS, deemed subject to IRS only 29,528.87 euros, regarding A…, and deemed subject to IRS only 13,119.16 euros, regarding B…, not withholding IRS at source as category A income from IRS on the remaining portion.

h) However, the AT, in February 2016, concluded that the number of years "multiplier" referred to in paragraph b) of no. 4 of article 2 of the IRS Code was not the number of years counted in accordance with clause 17 of the ACTV of the banking sector, but rather the number of years (or fraction) in which the Requesters worked in the credit institution that assumed the position of "obligor entity", resulting in the additional assessments here in disagreement.

i) Disagreeing with the AT's position, the Requesters consider that the calculation of "seniority" relevant for determining the multiplier, referred to in paragraph b) of no. 4 of article 2 of the IRS Code, shall be that expressed in the terms of the agreement terminating the employment relationship, and which results from the instrument of collective regulation of the banking sector, as upheld by the decisions of the Central Administrative Court South of 11.05.2004 (case 06002/01) and 21 September 2010.

II. REGARDING THE SINGULAR ARBITRAL TRIBUNAL (TAS)

j) The request for constitution of the TAS was accepted by the President of the CAAD and automatically notified to the AT on 12-06-2017.

k) By the CAAD Deontological Council, the signatory of this decision was appointed as arbitrator, and the parties were notified thereof on 26-07-2017. The parties did not manifest willingness to challenge the appointment, in accordance with article 11, no. 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

l) The Singular Arbitral Tribunal (TAS) has been regularly constituted since 10-08-2017 to examine and decide on the subject matter of this dispute (articles 2, no. 1, paragraph a) and 30, no. 1, of the RJAT).

m) All these acts are documented in the communication constituting the Singular Arbitral Tribunal dated 10-08-2017, which is hereby reproduced.

n) On 10-08-2017, the AT was notified in accordance with and for the purposes of article 17-1 of the RJAT. It replied on 06.10.2017. It further attached the file in digitized format, composed of PA1 – 4 sheets; PA2 – 1 sheet; PA3 – 32 sheets; PA4 – 16 sheets; PA5 – 1 sheet; PA6 – 40 sheets; PA7 – 1 sheet; PA8 – 2 sheets; PA9 – 1 sheet; PA10 – 2 sheets; PA11 – 94 sheets; PA12 – 58 sheets; PA13 – 15 sheets and PA14 – 2 sheets.

o) The parties meeting provided for in article 18 of the RJAT was not held. The parties produced written submissions, the Requesters on 02.11.2017 and the Respondent on 15.11.2017, both arguing for what they had already stated in the request and response proceedings, respectively.

PROCEDURAL PRESUPPOSITIONS

p) Legitimacy, capacity and representation – The parties possess legal personality, procedural capacity, are legitimate parties and are represented (articles 4 and 10, no. 2, of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March).

q) Principle of adversarial procedure - The AT was notified in accordance with paragraph n) of this Report. All procedural documents and all documents attached to the case were made available to the respective counterparty in the CAAD Procedural Management System.

r) Dilatory exceptions - The arbitral procedure does not suffer from nullities and the request for arbitral decision is timely regarding Requester A..., since it was presented within the prescribed period in paragraph a) of no. 1 of article 10 of the RJAT, as results from the uncontested fact that the date for payment of the tax impugned here ended on 01 March 2017 and the request for decision was filed with the CAAD on 31 May 2017.

s) The exception of untimeliness of submission of the request for decision was raised regarding Requester B…, which will be examined first.

SUMMARY OF THE POSITION OF THE REQUESTERS

t) The Requesters disagree with the reading of the law - paragraph b) of no. 4 of article 2 of the IRS Code - that the AT adopted during the inspection procedure, which culminated in the additional IRS assessments for 2013 here in dispute.

u) They state regarding the application of clause 17 of the ACTV of the banking sector, to integrate the definition of the expression "seniority" used in paragraph b) of no. 4 of article 2 of the IRS Code: "as is expressly provided in articles 1, 2 and 3 of the Labour Code, instruments of collective labour regulation constitute sources of labour law", adding that "... the relevance of instruments of collective labour regulation in fixing the meaning of concepts of labour nature, imported to the scope of tax relationships, has been equally and abundantly confirmed by numerous judicial decisions, from superior instances, some of which attached to the AT...".

v) They invoke in favour of their understanding the content of the decision of the CAC South of 11 May 2014 (Case no. 06002/01) and the decision issued on 21 September 2010, in the context of Case no. 03478/10, regarding identical situations.

w) And they state that "the interpretation defended by the AT, extracted from the binding information resulting from case 1818/10, leads to the application of a single multiplication factor, applicable both to the seniority criterion and to the criterion relating to the number of years of service provided to the employer entity with which the employment relationship is terminated, thus contradicting the content of the norm, which expressly distinguishes the two situations (number of years/fraction of seniority vs number of years or fraction of service in the obligor entity)".

x) Adding that: "what is not at issue is the enforceability of the clause of the Banking CLA that defines the concept of seniority, that is, of a norm of contractual source, but the interpretation of the term 'seniority' through the instrument provided in no. 2 of Article 11 of the LGT, '...the interpreter using the source of law that best defines that concept, in this case the CLA of the banking sector, by force of the labour legal order concretely applicable to the case', in accordance with arbitral decision CAAD - Case 230/2016-T".

y) They conclude by stating that one must conclude "... that the concept of seniority provided for and contemplated in the normative under analysis refers to the time in which the worker performed their labour activity in a certain activity and not only to the time in which they provided service to the entity paying the compensation due by the termination of the respective employment contract".

SUMMARY OF THE POSITION OF THE RESPONDENT

By way of exception

z) The Respondent invokes, first, the untimeliness of the request for arbitral decision regarding Requester B…, since in the assessment note, the deadline for payment of IRS appears as 06 January 2017 and the request for constitution of an Arbitral Tribunal was submitted on 31 May 2017, concluding that, as of that date, the legally defined deadline for challenging, in arbitral proceedings, the aforementioned IRS assessment act had already been exceeded, and therefore the request is untimely.

By way of substantive challenge

aa) Disagreeing with the position of the Requesters, the Respondent proposes another reading of the norms in question, expressing textually the following:

· "... the AT understands that the seniority to be accounted for, for the purposes of no. 4 of article 2 of the CIRS, is the seniority in the entity obliged to pay the compensation for termination of the employment contract, and it is not necessary to consider, in the application of the aforementioned legal provision, the seniority in a previous employer, even if the worker and the new employer have agreed that it be considered in any future 'indemnities', by employment contract or arising from instruments of collective labour regulation".

· "The concept of seniority – seniority per se, without any qualifier – in labour matters does not carry special scientific density that removes it significantly from the sense of everyday language: translating, as in other legal contexts, a legally relevant interval, with various effects, between a certain initial term and a certain final term".

· "Although collective labour regulation instruments – but not only these – add various qualifiers to labour seniority, the truth is that the Labour Code does not define what "seniority" is nor presents a univocal qualification of it, observing however, extensively, the prevalence of the notion of 'seniority in the company', including in matters of termination of the employment contract".

· "In accordance with article 339 of the Labour Code of 2009 (article 383 of the Labour Code of 2003), interpreting the expression 'indemnity' also as 'compensation', in matters of termination of the employment contract, collective labour regulation instruments may regulate the criteria for defining indemnities (compensations) and the periods of procedure and notice, and may also regulate the amounts of indemnities (compensations) but, in this case, within the limits set by the Code – matters excluded from the availability of the parties in the employment contract". "From the expiry of the employment contract, from dismissal for objective reasons, from the substitution of reinstatement resulting from the illegality of dismissal or from termination of the contract by the worker based on unlawful act of the employer – that is, from the situations that give rise to the aforementioned compensations or indemnities – must be distinguished the agreement of termination/revocation of the individual employment contract, in which the freedom of contract and thus the negotiating autonomy between the parties is not limited, and they may thus agree between themselves various pecuniary counterparties for the cessation of the contract, possibly translated into a global pecuniary compensation which, not having to respect legal limits, is entirely at the availability of the parties". And concludes:

· "Analyzing the content of the collective labour agreements of the banking sector, which contains that clause 17 (under the heading 'Determination of Seniority'), it is important to conclude that, beyond the indemnification regime by substitution of reinstatement resulting from the illegality of dismissal, such instruments do not apply to compensations/indemnities for expiry of the employment contract, for dismissal for objective reasons, for termination of the contract by the worker based on unlawful act of the employer or for an agreement of termination/revocation of the employment contract – matters which, properly considered, are therefore removed from the normative effects arising from such clause 17, simply because they do not form part of 'all the effects provided for' in such instruments."

bb) It further states the following: "the legal problem which is the subject of the proceedings does not confine itself to knowing which concept of seniority to consider in the application of paragraph b) of no. 4 of article 2 of the IRS Code, in light of the provision of no. 2 of article 11 of the LGT", "quite the opposite, the question concerns the fact of knowing whether that paragraph b) of no. 4 of article 2 of the IRS Code, while bearing its own sense of the concept of 'seniority in the company' which is shown to exist, can be permeable to other qualifications of seniority agreed in legal instruments of a negotiating nature, bilateral or collective, which impose on the entity obliged to pay the pecuniary benefit referred to in that norm a seniority greater than that corresponding to the duration of the contractual relationship granted by such entity".

cc) And continues expressing: "Bearing in mind that 'the qualification of the legal transaction effected by the parties (...) does not bind the tax administration' in accordance with no. 4 of article 36 of the LGT – a norm which naturally, by a fortiori, encompasses the qualifications of the parties concerning the object of the transaction – the question will have to obtain its solution in the complete legal interpretation of all the normative involved by the expression 'number of years or fraction of seniority or of performance of functions in the obligor entity', contained in paragraph b) of no. 4 of article 2 of the IRS Code."

dd) It states: "the reason why the legislator combined, alternatively and inclusively, the expressions 'seniority' or 'of performance of functions' has to do with the need for a comprehensive normative provision, so as to capture the multiple situations generating dependent labour income, respectively the employment contract or service provision, on the one hand, and the performance of public function, service or office, on the other hand". And that, quoting the annotation to the decision of the CAC South on the seniority of a banking sector worker, by Filipe Fraústo da Silva and Cláudia Reis Duarte: ""…one cannot fail to admit that the legislator intended to refer the phrase 'in the obligor entity' to the two realities that literally precede it – the situations of cessation of contract and the situations of cessation of performance of functions (…). Nor do we see any reason why the tax legislator should have intended that the concept to be followed in the first situation be unjustifiably broader than in the second, creating a situation of inequality which, ultimately, could even affect the constitutional principle. (…). We thus understand that the normative segment 'in the obligor entity' (which is, and cannot fail to be, in our view, the entity obliged to pay the amounts whose tax treatment the norm establishes) refers to the two situations that precede it, and should be considered, in both situations, the number of years or fraction of seniority in the obligor entity or the number of years or fraction of performance of functions in the obligor entity."

ee) "Also the more relevant doctrine on the subject, regarding the seniority to be considered in the application of no. 4 of art. 2 of the CIRS, understands that ''It is not opposable to the tax administration the terms of the ACTV banking sector that impose, in the transfer of a worker between credit institutions, the counting of the time of seniority verified in the previous or earlier credit institutions of which the worker has been an employee. As, by a fortiori, also it is not any agreement which, concerning the guarantee of benefits inherent to seniority, has been concluded between the worker and the employer. Without considerations that could today be provided by the subjective extension of the concept of employer effected by no. 10 of art. 2, since that is based on relationships of domination or group between companies, regardless of their geographical location, we reaffirm here the known orientation of the Tax Administration according to which the time of seniority relevant is, only, the time of seniority 'acquired' in the entity with which the individual employment contract is terminated, as literally results from the law, not seeming there is any margin for another type of interpretation". (Taxation 13/14, Manuel Faustino and Others, "On the meaning and scope of the new wording of article 2, no. 4 of the CIRS)".

ff) Still disagreeing with the meaning proposed in the decisions of the TCAS invoked by the Requesters, the Respondent cites the annotation which, by its reasoning, deserves to be highlighted here (see Annotation to the Decision of the Central Administrative Court South on seniority of a banking sector worker (for the purposes of calculating the amount of compensation for termination of the employment contract not subject to taxation, in accordance with no. 4 of article 2 of the IRS Code), by Cláudia Reis Duarte and Filipe Fraústo da Silva in the Journal of the Bar Association, no. 1, 2012).

gg) And cites the following passage from the annotation referred to above: "Now, admitting this position, and in an interpretation consistent with that upheld in those decisions, the court would be forced to admit that, if in a certain agreement for termination of employment contract, there is included a clause in which it is agreed to recognize a fictitious seniority, or immediately before that agreement for termination is amended to the contract now including such a clause, that is the seniority attributable for labour purposes, and therefore the seniority to be considered as the multiplication criterion in the negative delimitation of tax incidence in IRS… It is thus crystal clear that, by taking as reference for filling the tax norm the concept of seniority adopted for labour purposes at the moment of cessation of contract and for purposes of calculating the compensation to be attributed to the worker, one would have found the way for the limit of the exclusion of taxation to be freely manipulable by the parties, which, we must agree, was certainly not – could not have been – the intention of the tax legislator.

In the ratio of the tax provision will be, in our view, the intention to grant a kind of benefit, excluding from taxation and rewarding with that exclusion proportionally more those who have maintained themselves for more years in the entity in which the contract or performance of functions ceases. If so, it would certainly not be in the spirit of the legislator to grant a greater exclusion of taxation to those who, not fulfilling this requirement, simply agree with the employer entity (or make use of a collective agreement that so provides) a seniority (in the sense of seniority in the company) that they do not actually have and that exceeds what they effectively have, that is, negotiating over a measure as if it were a freely available legal asset.

(…) such an interpretation would allow a manipulation by simple agreement of the parties that, we believe, has no place in the letter nor in the spirit of the tax norm. We believe therefore that (…) the concept of seniority to be adopted should be the strictest, concept measure, of seniority in the company, which leads to the solution identical to that which we consider to be more correct and which we understand results from the literal element itself, which is that the tax legislator intended to refer to seniority in the obligor entity."

hh) And ends by stating: "reasons why the 'other effects, within the limits of the law' which the parties in the revocation of the employment contract have the possibility of agreeing, in accordance with the provision of article 349, no. 4 of the Labour Code of 2009, certainly do not encompass the possibility of being attributed a tax advantage through the mutual adjustment of a seniority superior to the actual seniority in the company, whether or not projecting that adjustment on the amount of the compensation for the termination of the individual employment contract".

ii) In further submissions, it adds that for the ACTV to be applicable "... it is necessary that the worker in question be affiliated to one of the aforementioned unions and that the credit institution be a subscriber to the aforementioned Agreement".

jj) It seeks the acceptance of the exception raised, with dismissal of the instance regarding Requester B… and the rejection of the request, with dismissal thereof, regarding Requester A…, considering the absence of any non-conformity with the law, in what pertains to the acts at issue here.

II - QUESTIONS FOR THE TRIBUNAL TO SOLVE

The exception of untimeliness of the request for decision presented by B… shall first be examined.

Next, it shall be examined whether the assessment in question suffers from some illegality that prevents its maintenance in the legal order.

It should be noted that some of the matter adduced by the Respondent, in the response, part of which was reproduced in the Report above, is not contained in the reasoning of the decision adopted, which supported the additional IRS assessments, as can be seen from the reading of the proved facts (part IV of this decision), where the reasoning of the inspection reports that were at the origin of the assessments in dispute is reproduced.

And as such the TAS could not even rule on this subject, which it will address by way of caution.

It is well known that everything that constitutes an alteration of the reasoning of the appealed act cannot later be adduced in the pleading stage, being the reasoning a posteriori irrelevant, the acts whose legality is questioned having to be examined as they were performed, the tribunal being unable, in the face of the finding of the invocation of an illegal ground as support for the administrative decision, to examine whether its action could be based on other grounds (see decisions of the STA of 10-11-98, of the Plenary, issued in appeal no. 32702, published in Appendix to the Official Journal of 12-4-2001, page 1207, of 19/06/2002, case no. 47787, published in Appendix to the Official Journal of 10-2-2004, page 4289, of 09/10/2002, case no. 600/02, of 12/03/2003, case no. 1661/02).

It is also observed that the TAS can only decide according to "the constituted law" in accordance with no. 2 of article 2 of the RJAT. In this line of thinking, account must be taken of the existence of decisions of the CAC on the merits of the underlying question, under pain of subjecting this decision to the appeal provided for in no. 2 of article 25 of the RJAT.

III – TIMELINESS OF THE ARBITRAL DECISION REQUEST REGARDING REQUESTER B…

The AT invokes the untimeliness of the request for arbitral decision regarding Requester B…, since the object of the request is the ex officio assessment of IRS, entailing that, in accordance with the provision of article 10, no. 1, paragraph a) of the RJAT, intending the Requesters to react to the act of ex officio assessment, the request for constitution of an Arbitral Tribunal should have been presented within the period of 90 days from the end of the period for voluntary payment, in conformity with the provision of article 102, no. 1, paragraph a) of the Code of Tax Procedure and Process (CPPT).

But, from the assessment note, it appears as the deadline for payment of IRS, the date of 06 January 2017, and therefore, having the Requester submitted the request for constitution of an Arbitral Tribunal on 31 May 2017, it appears that, as of that date, the legally defined deadline for challenging, in arbitral proceedings, the aforementioned act of IRS assessment had already been exceeded, and therefore the request is untimely.

Deciding.

The request for decision was accompanied by document no. 4 which refers to the additional IRS assessment - statement of account adjustment –, relating to Requester B….

It is stated here that they had to pay 26,982.81 euros and the deadline for payment is indicated as 2017.03.06.

No other document shows another deadline, nor does the AT dispute the reproduction of the document in question.

Therefore, having the request for decision been filed with the CAAD on 31.05.2017, it appears that the period of 90 days was complied with, from the end of the period for voluntary payment, in conformity with the provision of article 102, no. 1, paragraph a) of the Code of Tax Procedure and Process (CPPT).

The exception raised is therefore unfounded.

IV - FACTUAL MATTER PROVED AND NOT PROVED.
JUSTIFICATION

Regarding the factual matter, the Tribunal is not required to rule on everything that was alleged by the parties, being instead incumbent upon it the duty of selecting the facts that matter for the decision and discriminating the proved matter from the unproved (in accordance with article 123, no. 2, of the CPPT and article 607, no. 3 of the CPC, applicable under article 29, no. 1, paragraphs a) and e), of the RJAT).

In this way, the facts relevant to the judgment of the case are chosen and delimited according to their legal relevance, which is established in consideration of the various plausible solutions to the question(s) of law (in accordance with the former article 511, no. 1, of the CPC, corresponding to the current article 596, applicable under article 29, no. 1, paragraph e), of the RJAT).

Thus, taking into consideration the positions assumed by the parties, the documentary evidence and the file attached to the case, the following facts were considered proved, with relevance for the decision, and uncontested by the parties, indicating the respective documents (proof by documents), as justification.

Proved Facts

1) Requester A… and Requester B…, signed with C..., agreements for revocation of employment contracts, respectively, on 30.04.2013 and 26.04.2013, in whose clause 15-2 was expressed: "taking into consideration the applicable terms of Clause 17 of the Collective Labour Agreements of the Banking Sector ("CLA") and considering the interpretation upheld in the decisions of the Central Administrative Court South of 11 May 2004 (Case 06002/01) and, in particular, of 21 September 2010 (Case 03478/10), both parties acknowledge their agreement on the determination of the employee's seniority by counting their time of service in banking entities indicated in the aforementioned clause of the CLA, for the purposes of the provision of paragraph b) of no. 4 of article 2 of the Personal Income Tax Code, as amended by article 108 of Law no. 64-B/2011, of 30 December" – in accordance with pages 6 to 14 of Document no. 9 attached with the request for decision (ppa) and pages 53 to 61 of PA11 attached by the AT with the response;

2) With reference to the IRS model 3 statement of the year 2013, by means of an official letter dated 25 February 2016, Requester A… was notified to "in accordance with no. 4 of article 57 of the CIRS ... within the period of 15 (fifteen) days, replace the income declaration..., adding the part of the indemnity that was not declared in the amount of €29,528.87" – in accordance with article 3 of the request for decision (ppa) and document no. 5 attached with the ppa;

3) With reference to the IRS model 3 statement of the year 2013, by means of an official letter dated 25 February 2016, Requester B… was notified to "in accordance with no. 4 of article 57 of the CIRS ... within the period of 15 (fifteen) days, replace the income declaration..., adding the part of the indemnity that was not declared in the amount of €55,520.84" – in accordance with article 18 of the request for decision (ppa) and content of the ppa - page 33 of PA11 attached by the AT with the response;

4) On 11 March 2016, Requester A… responded to the AT invoking the application of all time of service rendered in the banking activity, attaching two Decisions of the CAC South - cases nos. 05971/12 and 03478/10 and a document proving that their seniority in the banking sector dated from April 1990 – articles 6 to 8 of the ppa and documents nos. 6 and 7 attached with the ppa;

5) On 10 March 2016, Requester B… responded to the AT invoking the application of all time of service rendered in the banking activity, attaching two Decisions of the CAC South - cases nos. 05971/12 and 03478/10 and a document proving that their seniority in the banking sector dated from 1 July 1990 – articles 21 to 23 of the ppa and document no. 11 attached with the ppa;

6) By means of an official letter dated 22 August 2016, Requester A… was notified of the draft corrections of the inspection report, to exercise the right of hearing, having on 07 September 2016 exercised that right, attaching at the time the agreement for revocation of the employment contract in question concluded with C… on 30 April 2013 – in accordance with article 9 and 15 of the ppa and documents nos. 8 and 9 attached with the ppa;

7) By means of an official letter dated 22 August 2016, Requester B… was notified of the draft corrections of the inspection report, to exercise the right of hearing, having on 07 September 2016 exercised that right, attaching at the time the agreement for revocation of the employment contract in question, concluded with C… on 26 April 2013 – in accordance with article 24 and 26 of the ppa and documents no. 12 and 13 attached with the ppa;

8) By means of an official letter dated 05 January 2017, Requester A… was notified of the Tax Inspection Report, having subsequently been notified of the assessment note no. 2017… and of the statement of account adjustment with compensation number 2017…, from which an adjustment resulted in the amount to pay of €15,430.75, with payment deadline until 01 March 2017, amount which was paid on an undetermined date - in accordance with articles 16 and 17 of the ppa and documents nos. 1 and 2, 10 and 17 attached with the ppa;

9) By means of an official letter dated 05 January 2017, Requester B… was notified of the Tax Inspection Report, having subsequently been notified of the assessment note no. 2017… and of the account adjustment with compensation number 2017…, from which an adjustment resulted in the amount to pay of €26,982.81, with payment deadline until 06 March 2017 – in accordance with articles 27 and 28 of the ppa and documents nos. 3 and 4 attached with the ppa;

10) In the report of the inspection procedure referred to in 8) the following reasoning appears: "Through consultation of the computer system, we verified that the taxpayer received income from category A (dependent labour income) of the IRS Code, and that they complied with the declarative obligations in accordance with article 57 of the IRS Code, within the periods provided in article 60 of the same legal instrument.

In accordance with the report drawn up by the Division for Inspection of Banks and Other Financial Institutions (DIBIF), irregularities were detected, in the context of IRS, namely, with the calculation of the time of service considered in the payment of indemnities.

And here we take the opportunity to state that the essence of the matter under analysis consists of knowing whether the seniority of a banking sector worker, for the purposes of IRS incidence, in the case of compensation for termination of the employment contract by mutual agreement, should be by reference to all the time of service rendered in that sector, even if to diverse employers, or only that rendered to the last one and with whom they came to effect that same termination.

In accordance with the aforementioned, as regards the amount of the indemnity, the respective Services, for purposes of calculating the part exempt from taxation, considered the calculation of the time of service as the seniority obtained by the employees in the entity obliged to pay the compensation for termination of the employment contract.

Consequently, in accordance with the criterion used - the number of years of seniority - the following calculations were determined, as discriminated in the table below:

[Table with calculation showing €159,147.00 compensation, 24 years service, €4,487.11 average monthly remuneration, €107,690.34 exempt indemnity, €51,456.36 taxable indemnity]

Now, as referred to above, based on the calculations elaborated, we verify that the values to be considered both from the exempt indemnity and concomitantly the portion to be considered as the taxable indemnity, should be rectified as discriminated in the table below:

[Table with dates and calculations]

...

"On the matter which here is deemed circumstantially relevant it is important to highlight the provision of paragraph b) of no. 4 of article 2 of the CIRS, which determines that the amounts received in the part exceeding the amount corresponding to the average value of regular remuneration with the character of remuneration subject to tax earned in the last 12 months multiplied by the number of years or fraction of seniority or of performance of functions in the obligor entity, in other cases, except when in the following 24 months a new professional or business relationship is created, regardless of its nature, with the same entity, in which case the amounts will be taxed in their entirety.

From the interpretation of the aforementioned legal provision, it must be concluded that in cases of receipt of indemnities for termination of employment contract, the law establishes a non-taxation (negative delimitation of the objective incidence of IRS in category A) albeit with a maximum limit. The limit of non-taxation is the average value of regular remuneration with the character of remuneration subject to tax, earned in the last twelve months, multiplied by the number of years or fraction of seniority or of performance of functions in the obligor entity, except when in the following 24 months a new professional or business relationship is created, regardless of its nature, with the same entity, in which case the amounts will be taxed in their entirety.

Nevertheless, even placing the hypothesis of knowing whether the banking CLA, in the case applied, could here at the tax level have any relevance, knowing that this is not law (formal) it seems to be set aside by force of the provision of article 112 of the CRP and article 1 of the Civil Code, for, not having been emanated by any state body, under its objective competence and within the material limits of its subjective competence, instead emanates from the agreement of wills formed between the trade unions and employers' associations of the sector of activity, and within the private domain of the will of the parties does not constitute law in formal and proper sense.

Moreover, the amount of the compensation for termination of the employment contract (the situation under analysis being) is not a matter limited by any mandatory legal norm and, therefore, nothing prevents the parties from, even in the case of negotiating it based on the seniority of the worker, considering a measure lower or higher than that which the worker effectively has.

Except for better opinion, it would certainly not be in the spirit of the legislator to grant a greater exclusion of taxation to those who, not fulfilling this requirement, simply agree with the employer entity (or make use of a collective agreement that so provides) a seniority that they do not actually have and that exceeds what they effectively have, that is, negotiating over a 'measure' as if it were a freely available legal asset.

We believe, therefore, that even adopting the interpretation according to which the tax norm refers only to seniority and there being need to resort to labour law to fill that concept, the concept of seniority to be adopted should be the strictest, 'measure' concept, of seniority in the company, which leads to the solution identical to that which we consider to be correct and which we understand results from the literal element itself, which is that the tax legislator intended to refer to 'seniority... in the obligor entity'.

And here arrived, still regarding the seniority factor, attending to the provision of the aforementioned legal norm, we cite the opinion of Manuel Faustino: 'It is not opposable to the tax administration the clause of the ACTV banking sector that imposes, in the transfer of a worker between credit institutions, the counting of the time of seniority verified in the previous or earlier credit institutions of which the worker has been an employee. As, by a fortiori, neither are any agreements which, regarding the guarantee of benefits inherent to seniority, have been concluded between the worker and the employer entity. Without considerations that could today be provided by the subjective extension of the concept of employer effected by no. 10 of article 2, once that is based on relationships of domination or group between companies, regardless of their geographical location, we reaffirm here the known orientation of the Tax Administration according to which the time of seniority relevant is, only, the time of seniority 'acquired' in the entity with which the individual employment contract is terminated, as literally results from the law, not seeming there is any margin for another type of interpretation'.

Nevertheless, we consider for purposes of better consolidation of the Services' position, regarding the controversial matter underlying this case, taking into account that there may exist legal instruments of a negotiating nature that impose on the entity obliged to pay the pecuniary compensation referred to in the norm a seniority greater than that corresponding to the duration of the contractual relationship attributed by the entity, the matter was redirected to the respective competent body, the central tax administration body - IRS Services Directorate, for higher examination and decision.

In this sense, the IRS Services Directorate came to pronounce on the calculation of indemnity for the purposes of paragraph b) of no. 4 of article 2 of the IRS Code related to its application to banking sector workers covered by the respective CLA, and the decision was issued on 2016.03.21, by the Director General, sanctioning the following understanding:

'The amounts earned by banking sector workers, by way of compensation for termination of the employment contract, covered by the CLA, paid by the last entity in which they provide service, being applicable the exclusion rule provided in paragraph b) of no. 4 of article 2 of the CIRS, must take into consideration for purposes of its calculation only the number of years or fraction of seniority or of performance of functions in the last obligor entity of the income which, by force of the historical-systematic element inherent to the norm of the current no. 10 of the aforementioned article, corresponds to 'employer/employer entity', with the breadth arising from this norm, as well as from situations of succession in the position of this entity, namely by effect of the equivalence inherent to article 285 of the Labour Code of 2009,'

Whereby it is concluded, in the present case of compensation for termination of the employment contract by mutual agreement, between Mr. A… and their employer entity Bank C…, the solution most consistent, regarding the concept of seniority for purposes of calculating the amount of compensation for termination of the employment contract not subject to taxation in accordance with no. 4 of article 2 of the aforementioned legal provision, should take into consideration only the number of years or fraction of seniority or of performance of functions in the last obligor entity of the income in accordance with the understanding propounded by the Services". – in accordance with pages 11 and 12 and 14 to 16 of Document no. 10 attached with the ppa;

11) In the report of the inspection procedure referred to in 9) the following reasoning appears: "Through consultation of the computer system, we verified that the taxpayer received income from category A (dependent labour income) of the IRS Code, and that they complied with the declarative obligations in accordance with article 57 of the IRS Code, within the periods provided in article 60 of the same legal instrument.

Consequently, in accordance with the criterion used - the number of years of seniority - the following calculations were determined, as discriminated in the table below:

[Similar table]

...

Whereby it is concluded, in the present case of compensation for termination of the employment contract by mutual agreement, between Mr. B… and their employer entity Bank C…, the solution most consistent, regarding the concept of seniority for purposes of calculating the amount of compensation for termination of the employment contract not subject to taxation in accordance with no. 4 of article 2 of the aforementioned legal provision, should take into consideration only the number of years or fraction of seniority or of performance of functions in the last obligor entity of the income in accordance with the understanding propounded by the Services" – in accordance with pages 11 to 12 and 14 to 16 of Document no. 14 attached with the ppa;

12) On 31-05-2017, the Requesters filed with the CAAD the present request for decision – registration of entry in the Procedural Management System of the request for decision.

Facts Not Proved

There is no other allegation of facts that has not been considered proved and that is relevant for the composition of the litigation.

V. ASSESSMENT OF THE QUESTIONS FOR THE SINGULAR ARBITRAL TRIBUNAL (TAS) TO SOLVE

The norm which is the subject of discussion in this case is contained in no. 4 of article 2 of the IRS Code, namely (we highlight the specific part of the norm which is the subject of disparate reading and we use the version of the Code that appears on the AT website):

"4 - When, in any way, contracts underlying the situations referred to in paragraphs a), b) and c) of no. 1 cease, but without prejudice to the provision of paragraph d) of the same number, as regards payments that continue to be owed even if the employment contract does not subsist, or the cessation of functions of public manager, administrator or manager of a legal person, as well as representative of a permanent establishment of a non-resident entity occurs, the amounts earned, in any capacity, are always subject to taxation: (Wording given by Law no. 64-B/2011, of 30 December)

a) In their entirety, in the case of a public manager, administrator or manager of a legal person, as well as representative of a permanent establishment of a non-resident entity; (Wording given by Law no. 64-B/2011, of 30 December)

b) In the part exceeding the amount corresponding to the average value of regular remuneration with the character of remuneration subject to tax, earned in the last 12 months, multiplied by the number of years or fraction of seniority or of performance of functions in the obligor entity, in other cases, except when in the following 24 months a new professional or business relationship is created, regardless of its nature, with the same entity, in which case the amounts will be taxed in their entirety. (Wording given by Law no. 64-B/2011, of 30 December).

That is, in concrete terms, the segment of the norm which is the subject of dispute is the multiplier that the law establishes: "…number of years or fraction of seniority or of performance of functions in the obligor entity, in other cases".

The AT understands that this multiplier is always the number of years of seniority in the company, in the obligor entity, in the employer entity that pays the indemnity and that appears as a party in the agreement for revocation of the employment contract with the worker. In practice, it understands that it is always the number of years of performance of functions in the obligor entity (employer) that revokes the employment contract, the relevant multiplier.

The Requesters understand that, in the absence of a definition in tax law of what should be understood by "seniority", by force of article 11, no. 2 of the LGT, regard should be had to what results from the CLA of the Banking Sector, particularly clause 17 of the ACTV, resorting to various decisions of the CAC South to that effect (seniority in the banking activity).

In "Labour Law", Pedro Romano Martinez, 2017 8th Edition, pages 423/424 states: "The seniority of a worker is related to various aspects. First, it may depend on the duration of the employment contract; in this case, seniority is measured according to the years of service of the worker in the company, as prescribed in no. 6 of article 112 of the CT, from the beginning of the probationary period.

A distinction can be made between activity in the company, which corresponds to years of service with the employer; and seniority in the activity, indicating the number of years the worker performs a certain activity in a given company; and seniority in the category, representing the number of years the worker has in that category. If the worker changed category, job position or activity, their respective seniority will not correspond to seniority in the company.

Seniority can have consequences at various levels, with three aspects worth highlighting.

First, regarding worker promotion, both in the case of automatic promotions, or even in the event of agreed promotions, where the employer proposes them based on a certain number of years of service.

Second, at the remuneration level, even if seniority does not imply a change in activity, it may entail differences in salary level, in the so-called length of service allowances, which consist of amounts added to remuneration, depending on years of service (article 262, no. 2, paragraph a) of the CT).

Third, in matters of dismissal. In the case of dismissal, years of service are relevant in determining the amount of compensation or indemnity to which the worker is entitled (in accordance with articles 366, no. 1 and 391, no. 1 of the CT,"

Examining the ACTV of the banking sector, it appears that there are "automatic promotions" (salary level increases) and allocation of "length of service allowances" besides other situations where seniority is relevant. It is natural that someone who changes banking institutions wishes to maintain their seniority level, with a view to more rapid career progression and salary increases, through length of service allowances, which occur simply through the passage of greater seniority. Beyond better protection of the level of compensation in the case of dismissal for reasons not attributable to them.

We can conclude that the Labour Code offers a very varied set of concepts of seniority. But the truth is that the ACTV of the banking sector is a source of labour law, as is an individual employment contract (articles 1, 2 and 3 of the CT).

What was agreed between the bank and the workers, in the revocation agreement and contained in 1) of the proved facts, namely: "taking into consideration the applicable terms of Clause 17 of the Collective Labour Agreements of the Banking Sector ("CLA") and considering the interpretation upheld in the decisions of the Central Administrative Court South of 11 May 2004 (Case 06002/01) and, in particular, of 21 September 2010 (Case 03478/10), both parties acknowledge their agreement on the determination of the employee's seniority by counting their time of service in banking entities indicated in the aforementioned clause of the CLA, for the purposes of the provision of paragraph b) of no. 4 of article 2 of the Personal Income Tax Code, as amended by article 108 of Law no. 64-B/2011, of 30 December", constitutes, in the reading of this TAS, not a clause that is imposed on the AT to 'artificially create' a greater tax benefit, but only a way of providing some degree of certainty regarding the applicable tax regime.

There was no creation, in the revocation agreement, of any 'new' right, with the intent of obtaining a tax advantage for the former worker, that would not result from the general labour law regime itself applicable to banking workers in general, through the respective collective regulation.

It is not indifferent, especially for someone losing their job, as an essential condition for acceptance of revocation by mutual agreement, to know whether the amount received is subject to IRS and Social Security contributions.

That is, that clause does not create in itself something that is imposed on the AT (which cannot or should not be subject to judicial review), and could have constituted, that is, a condition sine qua non for workers who accepted the revocation to give their consent to the proposed amount.

The relevance of the seniority of banking workers in the banking activity, and not only in one institution, in accordance with clause 17 of the ACTV, does not aim to obtain a more favourable regime at the level of terminations of employment contracts by mutual agreement, but rather aims, namely, to safeguard various other relevant aspects of the professional career of the employee, entirely subject to judicial review (referred to above), and not only, it should be noted, to establish a regime of contract revocation aimed at obtaining a more favourable tax regime than other workers in other sectors of activity, where, moreover, identical clauses may exist in collective regulation or in individual contracting.

The Literal Element of the Norm

The literal element of the norm is always a very relevant element, for being a delimiter of interpretive activity.

It cannot, however, be considered by the interpreter the legislative intent that does not have in the letter of the law a minimum of verbal correspondence, even if imperfectly expressed. The letter is an irremovable element of interpretation, or a "limit of the search for the spirit".

"An interpretation that is not already within the scope of possible literal meaning is no longer interpretation, but modification of meaning" (Larenz).

"(...) it must be a meaning (a motivation, a set of objectives) that reasonably fits within the literal sense of the legislator's declaration. Under pain of, if this does not occur, creating a new norm, rather than interpreting an already existing norm" (Hespanha).

The AT considers that, as the norm is worded, this segment: "…number of years or fraction of seniority or of performance of functions in the obligor entity, in other cases" should be read as follows:

- Number of years or fraction of seniority in the obligor entity (employer);

- Number of years of performance of functions in the obligor entity (employer).

Although the comments contained in the annotation to the decision of the CAC South (decision of 21.09.2010 – Case 3748/10) on the seniority of the banking sector are relevant, it appears to us debatable that one should consider that the legislator, given the way in which they worded the text of the norm in question, intended that the concept of "seniority" be only that obtained in the employer entity (obligor) terminating the contract.

The same reasoning provided by the AT would, in our view, empty of content part of the norm, which in containing the expression "in other cases", seems to lead the interpreter to the idea that two different mechanisms are established here to assess, determine, the multiplier, leading to differentiated results.

The reading of the law defended by the AT appears to lead, in practical terms, to the multiplier always being the same, whether by the criterion of "seniority" or by the criterion of years of performance of functions in the employer entity that revokes the employment contract. And thus interpreting the norm, we would be faced with equal results, for cases in which the law seems to provide different mechanisms.

That is, for situations of different law and fact, different solutions are supposed to be established. And in this line of thinking it does not seem that one should speak of violation of the principle of material equality (isonomy) because it is a matter of establishing different multipliers for differentiated expectations, created based on different legal and factual realities.

This segment of the norm thus seems to intend to consider two distinct realities (with differentiated solutions) for determining the multiplier in question:

- Number of years or fraction of seniority (understood this in general terms, without qualifying the type of seniority); or

- Number of years or fraction … of performance of functions in the obligor entity.

For the norm adds next to the last expression (or performance of functions in the obligor entity): "in other cases", leading to the perception that it contains two distinct mechanisms for obtaining the multiplier, in the alternative, there being thus, at least, "two" cases, distinct, contained in the provision of the norm.

Which are to lead to different results, the recipients of the norm following the regime that is concretely more favourable to them. It is a choice of the more favourable tax regime, a process of tax avoidance, within the provision of a tax law norm.

It seems, thus, that this reading of the law (considering that defended by the AT) is also possible, in light of the literal element of the norm.

The same is so when in the study cited above it states (emphasis ours) "it is not opposable to the tax administration the terms of the ACTV banking sector that impose, in the transfer of a worker between credit institutions, the counting of the time of seniority verified in the previous or earlier credit institutions of which the worker has been an employee", it appears to us that this is not a question of enforceability of a norm of contractual source to the AT, but only and simply of interpreting the expression "seniority", through the mechanisms that tax law provides, that is, ex vi article 11, no. 2 of the LGT, the interpreter resorting to the source of law that best defines that concept, in this case the CLA of the banking sector, by force of the labour law order concretely applicable to the case. And, as referred to above, the term "seniority", in the definition of the CT, encompasses a significant range of situations. Nothing will allow the interpreter to have a restrictive view of the comprehensive meaning, according to labour law, of this expression.

One may not agree with a certain reading of a norm, which its literality accepts, but we would be only and solely within the scope of its interpretation and in the effort to search for the most assertive reading.

Finally and in a decisive manner, the various decisions cited of the CAC South are in this sense (of valuing the concept of seniority set forth in the CLA of the banking workers, when dealing with workers of that sector and contract terminations by mutual agreement), whereby the TAS would always have to judge according to the "constituted law", and the reading of the law there established should be considered as the most assertive and generating legal certainty before citizens and economic agents.

And it is in this line of thinking that the content of no. 2 of clause 15 appended to the agreements for revocation of employment contracts is understood, namely the reference to decisions of the CAC South.

Taking into account the dates of issuance of the CAC South decisions in question (2010, 2012 and 2013), if the legislator understood that the reading of the law there embodied deserved objection, they would have already proceeded to alter or correct the text of the law.

There is, however, one aspect that cannot fail to be addressed. The banking worker when joining a banking institution, coming from another, could, in theory, have negotiated an exit by mutual agreement and received compensation for the seniority they had there (although the normal situation would be for the worker to have to indemnify the banking entity, to avoid waiting for the period of notice for termination of the contract). And it would not be acceptable that, at a later time, they would use - again - that "seniority" to increase the multiplier of the compensation in case of subsequent revocation of the employment contract.

In the context of the procedure in no. 2 of article 65 of the IRS Code, or in the course of an inspection procedure, the AT can avail itself of the records of IRS declarations filed for many previous years and other declarative obligations of the paying entities. It can obtain specific information from, namely, the banking institution, the previous and current one, and also from the taxpayer (principle of investigation and principle of cooperation) or other entities that must collaborate with it.

This factuality could be ascertained by the AT, in the context of the procedure referred to above, preventing the application of the law in the comprehensive reading that we highlight here (should it be concluded that there was improper use of this tax regime) through, namely, the application of the general anti-abuse clause in no. 2 of article 38 of the LGT.

Personal Scope of Collective Agreement versus Principle of Affiliation

Although this reasoning of the appealed act was not produced in the appropriate venue – see proved facts in the part of reproduction of the reasoning expressed in the inspection reports – it is appropriate to say something about the matter.

The Respondent alleges that for the ACTV to be applicable "... it is necessary that the worker in question be affiliated to one of the aforementioned unions and that the credit institution be a subscriber to the aforementioned Agreement".

If so, in the context of a procedure aimed at producing the decision in accordance with no. 2 of article 65 of the IRS Code or the inspection procedure, nothing prevented the AT, in the exercise of the powers-duties at its disposal, from raising this very matter with the taxpayer, the former employer entity or the unions that are parties to the CLA.

In the IRS declaration of the various years it is possible to verify whether the worker pays union quotas. Furthermore, the banking entity itself, in principle, withholds at source, deducts and pays to the Union the union quotations of its workers, whereby it could always indicate which union a certain worker is affiliated to, if requested.

These are facts aimed at substantiating a decision that could have been ascertained before it was adopted.

On the other hand, nothing of what was alleged by the parties leads us to conclude that the Bank that paid the compensation treated the Requesters differently from other workers who may have been subject to contract revocation. That is, it should be presumed that a general and abstract behaviour occurred for all who had worked in previous banking institutions, in accordance with the rules of labour law.

The Bank, in applying the rule of clause 17 of the CLA (which burdened the amounts to be paid), indicates that it availed itself of the application of the CLA in question. And if there was no affiliation/connection of the worker terminating the contract to a Union, the Bank would surely be the first to have interest in that outcome, because it would reduce the amount to be paid.

It should be noted that the relevance of clause 17 of the ACTV of the banking workers, for this case, has to do with the fact that it is a source of labour law, at the level of the banking sector, with a view to integrating what should be understood by "seniority" for the purposes of applying the norm contained in paragraph b) of no. 4 of article 2 of the CIRS.

Even if this were not so, this matter would still constitute reasoning of the appealed act, adduced a posteriori, which the Court cannot take into account.

Whereby, in light of the foregoing, the request for arbitral decision is well-founded.

Request for Condemnation of the AT to Reimburse Amounts Paid and for Payment of Compensatory Interest

It was proved in 8) of the agreed factual matter that Requester A… paid €15,430.75, on an undetermined date.

Indeed, from document no. 17 attached with the request for decision, there is no record of the payment date. And in the request for decision there is no reference to the payment date.

As for Requester B…, it is not even alleged that payment has been made, merely referring to that "... to be paid by Requester B…", in accordance with article 28 of the ppa.

Thus, as regards Requester B…, this TAS cannot condemn the AT to reimburse something that was not proved to have been paid and also to the payment of compensatory interest which is only due when there is "payment of tax debt" (no. 1 of article 43 of the LGT).

This, without prejudice to, should such absence of allegation and proof have resulted from oversight, the AT being able to carry out the payment of compensatory interest, in accordance with what is stipulated in the circular letter no. 60049 of 14-09-2005 of the Directorate of Tax Justice Services.

By annulling, as will be annulled, the additional IRS and interest assessments impugned here, for being in non-conformity with the law, it results that Requester A… is entitled to reimbursement of the amount paid in excess.

Request is further made for condemnation of the AT to payment of compensatory interest.

In accordance with the provision of paragraph b) of article 24 of the RJAT, the arbitral decision on the merits of the claim for which there is no appeal or impugnation binds the Tax Administration from the end of the period set for appeal or impugnation, and this must, in the exact terms of the acceptance of the arbitral decision in favour of the taxpayer and up to the end of the period set for voluntary execution of decisions of judicial tax courts, 'restore the situation that would have existed had the tax act which is the subject of the arbitral decision not been carried out, adopting the acts and operations necessary for that purpose', which is in harmony with the provision in article 100 of the LGT (applicable by force of the provision in paragraph a) of no. 1 of article 29 of the RJAT) which establishes that 'the tax administration is obliged, in case of total or partial acceptance of a complaint, judicial impugnation or appeal in favour of the taxpayer, to immediately and fully restore the legality of the act or situation which is the subject of the litigation, including payment of compensatory interest, if applicable, from the end of the period of execution of the decision'.

Although article 2, no. 1, paragraphs a) and b), of the RJAT uses the expression "declaration of illegality" to define the competence of arbitral tribunals operating in the CAAD, making no reference to condemnatory decisions, it should be understood that this encompasses the powers that, in judicial impugnation proceedings, are attributed to tax courts, and this is the interpretation that is in harmony with the sense of the legislative authorization on which the Government based its approval of the RJAT, in which it proclaims, as first guideline, that 'the tax arbitration process must constitute an alternative procedural means to judicial impugnation proceedings and to the action for recognition of a right or legitimate interest in tax matters'.

The judicial impugnation process, despite being essentially a process of annulment of tax acts, admits the condemnation of the Tax Administration to payment of compensatory interest, as is apparent from article 43, no. 1, of the LGT, in which it is established that 'compensatory interest is due when it is determined, in a gracious complaint or judicial impugnation, that there was error attributable to the services from which payment of the tax debt in an amount superior to the legally due resulted' and article 61, no. 4 of the CPPT (in the wording given by Law no. 55-A/2010, of 31 December, to which corresponds no. 2 in the original wording), which states 'if the decision recognizing the right to compensatory interest is judicial, the payment period counts from the beginning of the period for its voluntary execution'.

Thus, no. 5 of article 24 of the RJAT, in stating that 'payment of interest is due, regardless of its nature, in accordance with the provisions of the general tax law and the Code of Tax Procedure and Process', should be understood as allowing the recognition of the right to compensatory interest in the arbitration process.

In the case at hand, it is manifest that, following the annulment of the assessments (IRS and interest) that will be effected, there is ground for reimbursement of overpaid tax and interest, by force of the aforementioned articles 24, no. 1, paragraph b), of the RJAT and 100 of the LGT, as this is essential to 'restore the situation that would have existed had the tax act which is the subject of the arbitral decision not been carried out'.

The substantive regime of the right to compensatory interest is regulated in article 43 of the LGT, which establishes, insofar as is relevant here, the following:

Article 43
Payment of Undue Tax Liability

1 – Compensatory interest is due when it is determined, in a gracious complaint or judicial impugnation, that there was error attributable to the services from which payment of the tax debt in an amount superior to the legally due resulted.

2 – There is also considered to be error attributable to the services in cases where, despite the assessment being made based on the taxpayer's declaration, the latter has followed, in its completion, the generic guidelines of the tax administration, duly published.

3 - Compensatory interest is also due in the following circumstances:

a. When the legal deadline for voluntary restitution of taxes is not met;

b. In case of annulment of the tax act on the initiative of the tax administration, from the 30th day following the decision, without the credit note having been processed;

c. When the review of the tax act at the initiative of the taxpayer is carried out more than one year after the request of the latter, except if the delay is not attributable to the tax administration.

4 - The rate of compensatory interest is equal to the rate of compensatory interest.

5 - In the period between the date of the end of the deadline for voluntary execution of a judicial decision that has become final and the date of issuance of the credit note, regarding the tax that should have been refunded by a judicial decision that has become final, compensatory interest at a rate equivalent to double the rate of default interest defined in general law for debts to the State and other public entities is due. (Added by Law no. 64-B/2011, of 30 December).

The illegality of the additional assessments is attributable to the Tax Administration, which issued them based on assumptions of law that did not occur: a reading of paragraph b) of no. 4 of article 2 of the IRS Code that is configured as being restrictive, given the provision of the norm, in the reading above propounded.

In the present case, the regime of no. 1 of article 43 of the LGT is to be applied.

Consequently, Requester A… is entitled to compensatory interest, in accordance with articles 43, no. 1, of the LGT and 61 of the CPPT, counted from the date on which they paid the amount of the assessment impugned here, regarding the amount paid in excess of €15,430.75.

Compensatory interest is due on the aforementioned amount, at the legal supplementary rate, in accordance with articles 43, no. 1, and 35, no. 10 of the LGT, article 24, no. 1, of the RJAT, article 61, nos. 3 and 4, of the CPPT, article 559 of the Civil Code and Ordinance no. 291/2003, of 8 April, from the date on which the payment occurred and up to the issuance of the respective credit note.

VI. OPERATIVE PART

In the terms and with the grounds set forth above:

1 The requests for annulment of the assessments (additional) of IRS are deemed well-founded

a) in the amount of €15,430.75 (fifteen thousand four hundred and thirty euros and seventy-five cents), corresponding to assessment note no. 2017…, to the account adjustment no. 2017…, and to the compensation no. 2017…, relating to the 2013 tax year, regarding A…;

b) in the amount of €26,982.81 (twenty-six thousand nine hundred and eighty-two euros and eighty-one cents) corresponding to the assessment note numbered 2017… to the account adjustment no. 2017…, and to the compensation no. 2017…, relating to the 2013 tax year, regarding B…;

annulling the acts of assessment of IRS and interest, for being in non-conformity with paragraph b) of no. 4 of article 2 of the Code, in the reading of the law above propounded;

2 The requests, deduced by A…, for reimbursement of €15,430.75 and for condemnation of the AT to payment of compensatory interest, calculated on this amount, from the date on which the amount was paid, until issuance of the respective credit note, are deemed well-founded.

3 The requests, deduced by B…, for reimbursement of €26,982.81 and for condemnation of the AT to payment of compensatory interest, are deemed unfounded, for lack of allegation and proof of payment.

Value of the case: in accordance with the provision of article 3, no. 2, of the Regulations on Costs in Tax Arbitration Proceedings (and paragraph a) of no. 1 of article 97A of the CPPT), the value of the case is set at €42,413.56.

Costs: in accordance with the provision of article 22, no. 4, of the RJAT, the amount of costs is set at €2,142.00 according to Table I attached to the Regulations on Costs in Tax Arbitration Proceedings, with €2,034.90 being charged to the Respondent (95%) and €107.10 being charged to Requester B… (5%), taking into account the split outcomes.

Notify.

Lisbon, 10 December 2017

Singular Arbitral Tribunal (TAS),

Augusto Vieira

Text prepared by computer in accordance with the provision of article 131, no. 5, of the CPC, applicable by reference from article 29 of the RJAT.

The wording of the present decision is governed by the spelling prior to the Orthographic Agreement of 1990.

Frequently Asked Questions

Automatically Created

How is severance compensation from employment contract termination taxed under Portuguese IRS rules?

Under Article 2(4)(b) of the CIRS, severance compensation from employment contract termination is partially exempt from IRS taxation. The exempt amount is calculated as the last monthly remuneration multiplied by the number of years of seniority (or fraction thereof), capped at applicable statutory limits. Only amounts exceeding this exemption threshold constitute taxable Category A income subject to IRS withholding at source.

What role does Clause 17 of the Banking Sector Collective Agreement (ACT) play in determining seniority for IRS tax exemptions?

Clause 17 of the Banking Sector Collective Agreement (ACT) establishes that for labor law purposes, a banking employee's seniority includes service time with all banking institutions within the sector, not merely the current employer. Taxpayers argued this clause should define 'seniority' for calculating the IRS exemption under Article 2(4)(b) CIRS, as collective labor agreements constitute sources of labor law under Articles 1-3 of the Labor Code and employment-related concepts imported into tax law should retain their labor law meaning.

Can seniority from previous banking sector employers be counted for the IRS exemption under Article 2(4)(b) of the CIRS?

This was the central dispute in Process 353/2017-T. The taxpayers contended that seniority from all previous banking sector employers should be counted pursuant to Clause 17 of the Banking Sector ACT, supported by two Central Administrative Court South precedents (Cases 06002/01 and 03478/10). The Tax Authority rejected this interpretation, arguing that the multiplier in Article 2(4)(b) CIRS refers exclusively to years of service with the specific employer paying the severance compensation, resulting in additional IRS assessments.

What is the procedure for challenging an IRS tax assessment on severance pay through CAAD tax arbitration?

To challenge an IRS assessment on severance pay through CAAD arbitration, taxpayers must file a request for constitution of an arbitral tribunal under the Legal Regime for Arbitration in Tax Matters (RJAT) within the statutory deadline (generally within 90 days from the payment deadline of the contested tax). The request must identify the contested assessments, state the legal and factual grounds, and specify the relief sought. The CAAD President accepts the request, appoints an arbitrator, and the Tax Authority is notified to respond. The procedure includes written submissions and may include a hearing before the tribunal issues its decision.

Are taxpayers entitled to compensatory interest (juros indemnizatórios) when an unlawful IRS assessment is annulled?

Yes, under Article 43 of the General Tax Law (LGT) and Article 61 of the Tax Procedure Code (CPPT), taxpayers are entitled to compensatory interest (juros indemnizatórios) when an unlawful tax assessment is annulled and they have paid amounts in excess of what was legally due. The interest is calculated at the legal rate in force from the date of payment until reimbursement, compensating taxpayers for the State's unlawful retention of funds. In Process 353/2017-T, the taxpayers expressly requested condemnation of the Tax Authority to reimburse the amounts paid increased by compensatory interest at the legal rate.

IRS Tax Arbitration on Severance Pay Exemption Under Banking Sector Collective Agreement Seniority Rules

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IRS Tax Arbitration on Severance Pay Exemption Under Banking Sector Collective Agreement Seniority Rules

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