Process: 358/2018-T

Date: February 28, 2019

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD case 358/2018-T addressed whether the 2.5% state surcharge (derrama estadual) introduced by Law 12-A/2010 of June 30, 2010 could be applied retroactively to taxable profits earned in the first half of 2010. The taxpayer, a parent company under the RETGS group taxation regime, challenged an IRC assessment for 2010 that applied the surcharge to the entire year's taxable profit of €6,693,058.65 (amount exceeding €2 million threshold). The core dispute centered on the principle of non-retroactivity of tax law under Article 12 of the General Tax Law (LGT). The claimant argued that since Law 12-A/2010 entered into force on July 1, 2010 (the day after publication, per Article 20), the state surcharge could only apply to profits generated from that date forward. The taxpayer invoked Article 12(2) LGT, which provides that for tax facts of successive formation (like IRC, which crystallizes at year-end), new tax laws apply only to the period elapsed from their entry into force. The claimant contended that applying the surcharge to the January 1 - June 30 period violated constitutional principles of non-retroactivity and lacked legal basis. The taxpayer sought annulment of the assessment rejecting their Request for Official Review, plus refund of €58,663.24 in overpaid state surcharge and compensatory interest of €8,016.77. This case illustrates the critical importance of temporal application rules in Portuguese tax law, particularly when new taxes are introduced mid-year affecting annual tax obligations like IRC.

Full Decision

ARBITRAL DECISION

The Arbitrators Fernanda dos Santos Maças (Presiding Arbitrator), Francisco Nicolau Domingos and Augusto Vieira (members), designated at the Center for Administrative Arbitration to constitute the present Arbitral Tribunal, hereby agree:

I. REPORT

  1. A...-SGPS, SA, a joint-stock commercial company with registered office at Rua ..., ..., ...-... ..., registered at the Commercial Registry Office under the unique registration number and collective person number ..., having been notified of the decision to reject the Request for Official Review No. ...2017..., which concerns the assessment act No. 2014..., relating to Corporate Income Tax ("CIT") for the tax year 2010, came on 26 July 2018 to file a request for arbitral pronouncement, pursuant to the Legal Regime for Arbitration in Tax Matters (RJAT).

  2. The Claimant requests that the Tribunal: (a) annul the act rejecting the Request for Official Review No. ...2017... (directly challenged act) which concerns the assessment act No. 2014..., relating to CIT for the tax year 2010, in the amount of € 137,507.85, which gave rise to the statement of account adjustment No. 2014..., in the amount of € 462,887.16 (indirectly challenged act), in the part of the surcharge (2.5%) charged under the state surcharge on taxable profit for 2010, determined from 01.01.2010 to 30.06.2010; (b) order that the Tax Authority (AT) proceed to refund the amount of € 58,663.24 relating to state surcharge unduly assessed and paid, plus the corresponding indemnification interest already due, in the amount of € 8,016.77, and accruing, by reason of the unwarranted deprivation of the amount of € 58,663.24.

  3. The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and automatically notified to the AT on 27-07-2018.

3-1 By the Deontological Council of CAAD, the arbitrators who are signatories hereto were designated, with the parties being notified on 03.08.2018, who manifested no objection to the designation, in accordance with article 11, nos. 1, paragraphs a) and b) of RJAT and articles 6 and 7 of the Deontological Code.

3-2 The Collective Arbitral Tribunal has been, since 02 October 2018, duly constituted to consider and decide the subject matter of this dispute (articles 2, no. 1, paragraph a) and 30, no. 1, of RJAT).

4- To support the request, the Claimant invokes, as the parent company of a group of companies taxed according to the RETGS:

a) Regarding the illegality of the assessment of the state surcharge charged in excess, it states that "the assessment act subject to rejection of the Request for Official Review now being challenged suffers from illegality, in the part relating to the determination of the state surcharge for the tax year 2010, due to manifest violation of the principle of non-retroactivity of tax law, in that it should have already been officially corrected by the AT, in particular in light of the most recent arbitral case law on the matter";

b) It considers that "the vexatio quaestio of the present proceedings is whether the state surcharge, in the year 2010, applies to the totality of taxable profit determined on the last day of the financial year – 31.12.2010, in the present situation – or whether it applies to the part of taxable profit determined from the date of entry into force of Law No. 12-A/2010, of 30 June";

c) "During the tax year 2010, Law No. 12-A/2010, of 30 June, came to add, among others, article 87-A to the Corporate Income Tax Code which fixed at € 2,000,000.00 the amount above which part of the taxable profit, subject to and not exempt from CIT, would be subject to the state surcharge at the rate of 2.5%, and which, by the legislator's choice, the determination of taxable profit, in the case where the RETGS is applicable – and for the purpose of applying the state surcharge – would be made, not by reference to the taxable profit of the group, but rather to the taxable profit determined in the individual periodic declaration of each company in the group, including that of the parent company";

d) And adds: "the legislator also made clear that would be disregarded – in the determination of the state surcharge – the effect of any tax losses determined individually in the companies within the scope of the group taxed under the RETGS", "Among the companies that constituted, at the date of the tax facts under consideration, the group of companies covered by the RETGS, only B..., S.A. (...) determined a taxable profit exceeding € 2,000,000.00, more specifically in the amount of € 6,693,058.65, with the 'additional' rate of 2.5% applied to € 4,693,058.65 – which exceeded € 2,000,000.00 – resulting in payment of € 117,326.47 under the state surcharge";

e) And concludes: "this means that the Tax and Customs Authority ("AT"), through this additional assessment act, came to apply the state surcharge to the part of taxable profit exceeding € 2,000,000.00 determined between 01.01.2010 and 31.12.2010", "however, the disputed tax act has no legal basis, in that this determination relating to the state surcharge constitutes an error in the factual and legal premises, in particular with regard to the application of no. 1 of article 87-A of the Corporate Income Tax Code, it is reiterated, added by Law No. 12-A/2010, of 30 June, to the period between 01.01.2010 and 30.06.2010" and "... the AT should have applied that 'additional' rate of 2.5%, certainly, but only to the part of taxable profit determined from 01.07.2010, in accordance with the general rules for applying tax law over time";

f) It bases its legal position on the provisions of no. 20 of Law 12-A/2010, of 30 June which establishes a transitional regime for entry into force, concluding, with regard to this legal provision that: "the discipline provided therein came to establish that, with the exception of situations expressly provided for in nos. 2, 3 and 4 of article 20 of Law No. 12-A/2010, of 30 June – in which the measure relating to the creation of the state surcharge is not included – the validity of that legal instrument would begin on the day following its publication". "Consequently, with regard to the state surcharge, more specifically to the addition of article 87-A of the Corporate Income Tax Code under analysis, Law No. 12-A/2010, of 30 June, entered into force on 01.07.2010, since, in the absence of legal provision of transitional provisions applicable to article 2 of Law No. 12-A/2010, of 30 June – this norm which came, as we have seen, to introduce the state surcharge – its temporal validity began on 01.07.2010". "In this sense, given the circumstance that the said legal instrument contains no special (express) solution for its temporal application, then the general rules on the application of tax law over time contemplated in article 12 of the General Tax Law (LGT) must be applied";

g) And for the reason that the CIT results from a "... 'tax fact of successive formation', which, for that reason, only crystallizes at the end of each tax year, the temporal application of article 2 of Law No. 12-A/2010, of 30 June, should be regulated by the provision of no. 2 of article 12 of the LGT, pursuant to which 'the new law only applies to the period elapsed from its entry into force'";

h) Resulting in that "... having article 2 of Law No. 12-A/2010, of 30 June, entered into force on 01.07.2010, the state surcharge 'added' by it can only apply to the portion of taxable profit generated from 01.07.2010, of course, to the amount exceeding the limit of € 2,000,000.00 established therein";

i) Concluding that "if this is understood to be the case, the act rejecting the Request for Official Review and, likewise, the underlying assessment act, appear to be intrinsically illegal, due to the absence of legal basis sustaining the temporal application of article 2 of Law No. 12-A/2010, of 30 June, to facts understood between 01.01.2010 and 30.06.2010". "In this measure, under pain of violation of the general rules on the application of tax law over time and of the principle of legality to which the AT is subject, more specifically, provided for in article 55 of the LGT, no. 1 of article 3 of the Code of Administrative Procedure (CPA) and no. 2 of article 266 of the Constitution of the Portuguese Republic (CRP), the Claimant considers that state surcharge is only due on the portion of taxable profit determined between 01.07.2010 and 31.12.2010, which, naturally, exceeds € 2,000,000.00", resulting in that "any interpretation other than this constitutes (in the terms and grounds that will be set out below) a manifest and egregious unconstitutionality, rendering the assessment now contested illegal", in that "... the retroactive application in question is unconstitutional, due to violation, among other constitutional provisions, of the provisions of article 103 of the CRP";

j) It concludes by noting that "consequently, having been assessed an amount of state surcharge totaling € 117,326.47, the application of the pro rata temporis principle dictates the disregard, for calculation purposes, of the portion of taxable profit exceeding € 2,000,000.00 determined between 01.01.2010 and 30.06.2010, and thus should be reimbursed to the Claimant the amount of € 58,663.24, corresponding to that time period, in compliance with the provision of no. 2 of article 12 of the LGT, plus the respective indemnification interest";

k) Any reading of the law not as above advocated would be "a manifest and egregious unconstitutionality, rendering the assessment now contested illegal", since "... no. 3 of its article 103 of the CRP comes to confer on the non-retroactivity of tax law the dignity of a constitutional principle by providing that 'no one may be required to pay taxes that have not been created in accordance with this Constitution, that have a retroactive nature or whose assessment and collection is not done in accordance with the law'";

l) It invokes in its favor the meaning and consequences of the following CAAD arbitral decisions in Proceedings Nos. 432/2016-T and 620/2017-T.

5- Notified, the Defendant responded on 07.11.2018, defending itself by exception and counter-argument alleging the following:

a) Regarding the lapse of the right of action, the Defendant states that "... the legally defined deadline for challenging this tax assessment act is (clearly) exceeded, specifically, in the context of arbitration", in that "article 10 of RJAT establishes, for assessment acts, that the deadline for presenting the request for arbitral pronouncement is 90 (ninety) days, referring, as to the moment when counting begins, to what is provided for in nos. 1 and 2 of art. 102, nos. 1 and 2 of the Code of Tax Procedure and Process (CPPT)", from which it follows "... that the stipulated 90 (ninety) day period would be counted from notification of the assessment statement now being challenged – in accordance with paragraph b) of no. 1 of art. 102, no. 1 of the CPPT". Now, "The additional assessment was notified to the taxpayer now Claimant on 29/12/2014..., with a payment deadline of 23/02/2015", "therefore, the request filed is untimely and the tribunal cannot hear it";

b) It further adds that "... the tribunal's powers of cognition are limited by the request, and obviously cannot exceed it, leaving the Tribunal prevented from assessing and declaring the annulment with respect to the 'tax act underlying it', that is the assessment, because the same is untimely", since it results "clear and unequivocally from the learned initial request, the direct challenge of the act of additional assessment statement of CIT, the request filed (leading to the declaration of illegality of the act and, consequently to its annulment) should be declared without merit, as untimely and, consequently, the Defendant Entity should be absolved from the suit – in accordance with paragraph e), of no. 1, of article 278 of the applicable Civil Procedure Code, applicable ex vi paragraph e) of no. 1 of art. 29, no. 1 of Decree-Law No. 10/2011, of 20 January, which is hereby requested";

c) Regarding the material incompetence of the Arbitral Tribunal to consider requests for declaration of illegality of the official review decision, the Defendant states that: "... in accordance with the provisions of art. 2, paragraph a) of Ordinance No. 112/2011, of 22 March, the AT bound itself to the jurisdiction of the arbitral tribunals operating in the CAAD which have as their object the consideration of claims relating to taxes whose administration is entrusted to them, referred to in no. 1 of art. 2 of RJAT, " with the exception of claims relating to the declaration of illegality of acts of self-assessment, withholding at source and payment on account that have not been preceded by recourse to the administrative route, in accordance with articles 131 to 133 of the Code of Tax Procedure and Process." "In the present case, the Claimant did not resort, in time, to the gracious objection provided for in no. 1 of art. 131 of CPPT which, in this case, was necessary since the now Claimant raised also questions of fact and attached documentation, as evidenced by the official review presented, where it invoked that it would only be possible to proceed to the assessment of the state surcharge inciding on taxable profit from 1 July 2010, the date of entry into force of article 87-A of the CIRC, introduced by Law No. 12-A/2010, of 30 June". Adding that:

d) "The Claimant allowed the 2-year period provided for in no. 1 of art. 131 of the CPPT for presentation of an administrative objection to elapse", since "... it only on 10/03/2017 filed a request for official review against the said additional CIT assessment". However, "Such administrative procedure cannot replace the gracious objection provided for in art. 131 of CPPT, especially when recourse to the same is made beyond the 2-year period provided for in no. 1 of such article", "... given the voluntary and conventional nature of arbitration, the interpreter cannot expand the scope set by the legislator with regard to the AT's binding to arbitral tribunals";

e) Regarding the merits, the Defendant alleges, among other things, that CIT is a direct and periodic annual tax, and "... as follows from no. 9 of article 8 of the Corporate Income Tax Code, the tax-generating event is considered to occur on the last day of the tax year, and the tax is due for each tax year", and that "the state surcharge has as the tax-generating event the taxable profit", adding that "... profit cannot be viewed in a fragmentary or isolated manner, but rather as a complex tax fact of successive formation, which begins on the first day of taxation and is only completed at the end of the respective tax year", "in accordance with the characteristic of annuality of the tax, which obviously is present in the context of the tax on income of legal persons";

f) And draws the following: "in the same way, by effect of the rule of annuality of the personal income tax, it should be understood that the tax-generating event only occurs on 31 December 2010", "given the complex incidence of the tax in question, and the requirement that it entails in terms of a unitary and global vision, such characteristics do not accord with any autonomization or division by time periods within the same tax year, since the tax-generating event of the CIT due with reference to the tax year 2010 occurred on the last day of such tax year", "and the additional rate of the surcharge applies to the taxable profit of this tax year, and the tax-generating event occurred on the last day of such tax year";

g) Regarding the alleged retroactivity of the law, it states that in the case of this proceeding we are faced with "... a situation of retroactivity of the 3rd degree, or using other terminology, a situation of weak, inauthentic or improper retroactivity, or also, retrospectivity", for the reason that it relates to "... corporate income tax (CIT), qualified in doctrine and case law as a periodic tax, conditioned by tax-generating events of complex and successive formation that only become full, for taxation purposes, at the end of the tax year", concluding that "... having regard to the factual circumstances that flow from the proceedings, it should be concluded that it is not possible to configure the existence of a degree of retroactivity capable of frustrating the application of no. 1 of article 87-A of the CIRC, after the publication of Law No. 12-A/2010, of 30 June";

h) Regarding the application of no. 2 of article 12 of the LGT, it refutes that there can be an application of the new law "pro rata temporis", especially because the "said law (No. 12-A/2010, of 30 June) approved a whole set of budget consolidation measures, which aimed to strengthen and accelerate the reduction of the excessive deficit and control the growth of public debt as provided for in the Stability and Growth Program", so "... as a budget consolidation measure the principle of annuality of the tax will always prevail, and the alterations to periodic taxes will be in force for the entire period of validity of the same budget, moreover being at issue the balance of public accounts, in a context of severe financial crisis in which the Portuguese State found itself";

i) It advocates that the situation in question, not being resolved by the "... criterion of hierarchy and chronology ... since none of the legal instruments in question, CIRC and LGT have enhanced value", should be resolved by recourse to the "... criterion of speciality, to state that the CIRC, or at least most of the normative statements contained therein, constitutes special regulation for purposes of establishing the criterion for temporal application of the relevant law in the context of CIT taxation, and therefore prevails with respect to the provisions of art. 12 no. 2 of the LGT, by virtue of the principle Lex specialis derogat legi generali".

j) And concludes: "with the norm of the General Tax Law set aside, which apparently could lead to taxation 'pro rata temporis' the regime inherent in no. 1 of art. 87-A of the CIRC prevails, applied to the taxable profit corresponding to the entire tax year";

k) Regarding the request for payment of indemnification interest, the Defendant states that "the arbitral process aims, in terms defined in RJAT, merely control of the legality of the challenged assessment, it cannot determine that there was 'error imputable to the services'". "In the case at hand and as has already been demonstrated, the situation that the law configures as 'error imputable to the services' is not present";

l) "In effect, the law did not provide for objective liability, but rather liability linked to the fault of the services". "This fault (the 'imputability to the services') – as intent or negligence – must be alleged and proved, and does not result automatically from any illegality", "that is, the duty of indemnification does not result immediately and automatically from the annulment of the act, being only due when it is determined that there was error imputable to the services";

m) And concludes: "in the case at hand, there is no evidence of any error imputable to the services in the issuance of the challenged assessment, and therefore, the request for payment of indemnification interest is without merit, as unfounded". And for the reason that CIT is "... an annual tax whose tax-generating event is only completed on 31 December, implicit in this is the application of the said Law No. 12-A /2010, of 30 June, to the entire year, regardless of its entry into force having occurred on 1 July, since the same contains no transitional provision providing otherwise", resulting in that "... the CIT assessment, in question in the present proceedings, is therefore not affected by any defect of illegality as the Claimant claims".

6- On 08.11.2018 the Claimant was notified to pronounce on the exceptions raised by the Defendant in the response (lapse of the right of action and incompetence of the Arbitral Tribunal), having responded on 19.11.2018.

7- By order of 06.12.2018 the holding of the meeting referred to in article 18 of RJAT was dispensed with, a deadline being granted for submission of written pleadings, if the parties so chose, and 02 April 2019 was designated as the deadline for the rendering of the arbitral decision.

8- Only the Claimant chose to submit pleadings and in written form on 19.12.2018.

II. PRELIMINARY ASSESSMENT

9-1 The parties are legitimate, enjoy legal personality and capacity to sue and are represented (articles 4 and 10, no. 2, of RJAT and article 1 of Ordinance No. 112-A/2011, of 22 March).

9-2 The exceptions of "lapse of the right of action" and "material incompetence of the Arbitral Tribunal to consider declaration of illegality of the official review decision" were raised and will be considered after the establishment of the facts.

9-3 The arbitral procedure is free from nullities.

It must be considered.

III. MERITS

III-1 FACTUAL MATTERS

10 Facts Established

The following facts are established as proven:

a) The Claimant is the parent company of a group of companies taxed in accordance with the RETGS, of which in the year 2010 the following subsidiary companies were part: B..., S.A. (...); C..., S.A. (...); D..., S.A. (...); and E..., S.A. (...) - as per article 4 of the PPA and lack of specified objection, assessed in accordance with article 110-7 of CPPT;

b) Among the companies that constituted, in 2010, the group of companies covered by the RETGS, only B..., S.A. (...) determined a taxable profit exceeding € 2,000,000.00, more specifically in the amount of € 6,693,058.65 – as per article 10 of the PPA and lack of specified objection, assessed in accordance with article 110-7 of CPPT;

c) The Defendant notified the Claimant of assessment No. 2014..., relating to Corporate Income Tax ("CIT") for the tax year 2010, in the amount of € 137,507.85, which gave rise to the statement of account adjustment No. 2014..., in the amount of € 462,887.16, in the part of the surcharge (2.5%) charged under the state surcharge on taxable profit for 2010, determined from 01.01.2010 to 30.06.2010 (Doc attached by SP and PA);

d) On 10.10.2017, the Claimant filed a request for review of the tax acts referred to in the preceding point, a procedure that took the number ...2017.... An information was drawn up with a proposal for a rejection decision, and by order of 2017.12.22, the taxpayer was ordered to be notified in accordance with and for the purposes of article 60 of the LGT, being granted a period of 15 days for the exercise of the right to be heard, which was notified to the representative of the taxpayer, through office no. 2017..., of 2017.12.28, sent by registered mail, to which was assigned the registration RF ... PT, of 2018.01.11;

e) After the period fixed for the exercise of the right to be heard, the taxpayer did not exercise his right – in accordance with article 16 of the PPA, Document no. 4 attached with the PPA, page 3 of Document no. 1 attached with the PPA and pages 5 and 10 to 21 of the PA attached to the proceedings by the AT;

f) By office no. 2018..., dated 17.05.2018, received on 22 May 2018, the Claimant was notified of the rejection decision handed down regarding the official review, with a date of 13 March 2018, with the reasoning that "it is the understanding of the IRC management services that the state surcharge has an accessory character of CIT, and should be treated as such and be determined on a yearly basis" – in accordance with article 19 of the PPA, Document no. 1 attached with the PPA and pages 1 to 9 of PA attached by the AT with the response;

g) On 26 July 2018 the Claimant filed the present request for arbitral pronouncement (ppa) – registration of entry in the CAAD's SGP of the request for arbitral pronouncement;

h) The Claimant proceeded to pay 117,326.47 euros under the state surcharge (cfr. points 11, 12, 63, and 64 of the Arbitral Request).

11 Unproven Facts

There is no other factuality alleged that has not been considered proven and that is relevant for the resolution of the procedural dispute.

12 Basis for Established and Unproven Facts

Regarding factual matters, the Tribunal does not have to pronounce on everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and distinguish between proven and unproven matters (as per article 123, no. 2, of CPPT and article 607, no. 3, of CPC, applicable ex vi article 29, no. 1, paragraphs a) and e), of RJAT).

Thus, the facts pertinent to the judgment of the case are chosen and selected based on their legal relevance, which is established in view of the various plausible solutions to the question(s) of law (as per former article 511, no. 1, of CPC, corresponding to current article 596, applicable ex vi of article 29, no. 1, paragraph e), of RJAT).

Thus, having regard to the positions assumed by the parties and the documentary evidence attached, the facts listed above were considered proven, as relevant to the decision, indicating, for each point brought to the established factual matters, the means of proof considered relevant, as justification. Especially regarding the fact established in point h), the same is due to the clear and reiterated allegation of the Claimant (that it paid and the way it articulated the Arbitral Request (and the request for official review), on the one hand and, on the other hand, given the lack of a position taken by the Defendant.

III-2 LAW

Having regard to the above, the following legal questions are to be decided:

• Material incompetence of the Arbitral Tribunal to consider requests for declaration of illegality of the official review decision;

• Lapse of the right of action;

• Illegality of the rejection of the official review due to error in interpretation of the surcharge created by Law No. 12-A/2010, of 20 June;

• Right to refund of unduly paid tax and indemnification interest.

III-2-1 PRELIMINARY ISSUES

A) Material Incompetence of the Arbitral Tribunal to Consider Requests for Declaration of Illegality of the Official Review Decision

The Defendant alleges, to support the exception, among other things, that the Claimant did not resort, in time, to the gracious objection provided for in no. 1 of art. 131 of CPPT which, in this case, was necessary "since the now Claimant raised also questions of fact and attached documentation, as evidenced by the official review presented, where it invoked that it would only be possible to proceed to the assessment of the state surcharge inciding on taxable profit from 1 July 2010, the date of entry into force of article 87-A of the CIRC, introduced by Law No. 12-A/2010, of 30 June".

On the other hand, according to the Defendant, the Claimant allowed "the 2-year period provided for in no. 1 of art. 131 of CPPT for presentation of an administrative objection to elapse", having filed on 10/03/2017 a request for official review against the said additional CIT assessment".

However, "Such administrative procedure cannot replace the gracious objection provided for in art. 131 of CPPT, especially when recourse to the same is made beyond the 2-year period provided for in no. 1 of such article", "... given the voluntary and conventional nature of arbitration, the interpreter cannot expand the scope set by the legislator with regard to the AT's binding to arbitral tribunals".

Likewise, according to the Defendant, the decision handed down in the context of an official review procedure may or may not entail consideration of the legality of the assessment act.

In the exercise of the right to reply, the Claimant argued, in summary, that it requested from the AT the review of the act of "assessment of the state surcharge inciding on taxable profit from 1 July 2010, the date of entry into force of article 87-A of the CIRC, introduced by Law No. 12-A/2010, of 30 June", as well as the payment of indemnification interest at the legal rate; and it did so pursuant to article 78 of the LGT". "In response, the AT expressly rejected that request, based on the supplementary information reproduced below: 'It is the understanding of the IRC management services that the state surcharge has an accessory character of CIT, and should be treated as such and be determined on a yearly basis. In light of the above, the official review of the respective CIT/2010, filed by A... SGPS SA (NIPC...) in the related proceeding No. ...2017...' should be rejected".

Concluding that "given the above, it is unquestionable that the present Request for Arbitral Pronouncement (i) is based on an express act of rejection in tax matters, as the application of tax law norms is made therein (in this case, article 87-A of the CIRC); (ii) that such express act of rejection implied consideration of the (il)legality of the act of 'assessment of the state surcharge inciding on taxable profit from 1 July 2010' and, concurrently, a substantive decision on that claim; and (iii) that that same act constitutes an 'administrative act' within the meaning of the definition advanced by article 148 of the Code of Administrative Procedure (CPA), applicable ex vi of paragraph c) of article 2 of the LGT – in that it is a decision handed down in the exercise of administrative-legal powers and intended to produce external legal effects in an individual and concrete situation", "and therefore there remain no doubts whatsoever as to the material competence of the Arbitral Tribunal to hear the substantive aspect of the present request – whose immediate object is a second-degree act, an understanding that has, moreover, been widely endorsed by arbitral case law.

Let us see.

The Tax and Customs Authority argues, in sum, that the Claimant should have resorted to the gracious objection provided for in no. 1 of article 131 of CPPT which, in this case, was necessary.

The competence of the arbitral tribunals operating in the CAAD is, in the first place, limited to the matters indicated in art. 2, no. 1, of Decree-Law No. 10/2011, of 20 January (RJAT).

In a second respect, the competence of the arbitral tribunals operating in the CAAD is also limited by the terms in which the Tax Administration was bound to that jurisdiction by Ordinance No. 112-A/2011, of 22 March, since art. 4 of RJAT establishes that «the binding of the tax administration to the jurisdiction of tribunals constituted in accordance with the present law depends on an ordinance of the Government members responsible for the areas of finance and justice, which establishes, in particular, the type and maximum value of disputes covered».

In paragraph a) of art. 2 of this Ordinance No. 112-A/2011, expressly excluded from the scope of the binding of the Tax Administration to the jurisdiction of arbitral tribunals operating in the CAAD are «claims relating to the declaration of illegality of acts of self-assessment, withholding at source and payment on account that have not been preceded by recourse to the administrative route in accordance with articles 131 to 133 of the Code of Tax Procedure and Process».

As stated in the Arbitral Decision relating to Proceeding No. 617/2015-T, "The express reference to the prior 'recourse to the administrative route in accordance with articles 131 to 133 of the Code of Tax Procedure and Process' should be interpreted as referring to cases in which such recourse is mandatory, through the gracious objection, which is the administrative means indicated in those articles 131 to 133 of CPPT, to whose terms reference is made. In truth, right away, it would not be understood that, where prior administrative challenge is not necessary 'when its basis is exclusively a matter of law and the self-assessment has been made in accordance with generic guidelines issued by the tax administration' (art. 131, no. 3, of CPPT, applicable to cases of withholding at source, by virtue of the provision of no. 6 of art. 132 of the same Code), the arbitral jurisdiction would be removed because such administrative challenge, which is understood to be unnecessary, was not made."

In the case at hand, there was a self-assessment and, subsequently, an additional assessment, which replaced it, with the arbitral request indirectly concerning the additional assessment act that materialized a correction to the taxable matter of CIT for the year 2010.

What is being questioned is not the self-assessment made by the Claimant – which assessed the surcharge it understood to be due – but the additional assessment later made by the Defendant. It follows from the request for arbitral pronouncement that the same indirectly concerns the additional assessment act No. 2014... of CIT, relating to CIT for 2010, and directly concerns the rejection of the request for official review.

As stated in Arbitral Decision 668/2016-T, "Excluding arbitral jurisdiction merely because the means used should have been a prior gracious objection would violate the principles of access to law and effective judicial protection.

"In effect, the rule, both for judicial challenge and for arbitration, is that all those acts with respect to which the AT has either not yet pronounced or had no intervention are submitted to the scrutiny of the AT, which is why it should be given the opportunity to pronounce before the court or arbitral tribunal pronounces as to their legality.

"There is thus manifest equivalence between the request for review of the tax act and the gracious objection on acts of self-assessment, withholding at source and payment on account. In truth, as stated in the Judgment of the Supreme Administrative Court (Plenary Session of the Tax Court Section, proceeding No. 0793/2014), of 3 June 2015, "(…) the procedural means of review of the tax act cannot be considered as an exceptional means to react against the consequences of an assessment act, but rather as an alternative means to the administrative and contentious impugnatory means (when used at a time when these can still be used) or complementary to them (when the deadlines for using the impugnatory means of the assessment act have already been exhausted)…"

"Following the mentioned Judgment, the Supreme Administrative Court decided that 'the Rejection, tacit or express, of the review request is susceptible to judicial control [cfr. art. 95, nos. 1 and 2, paragraph d), of the LGT]'".

"It is today settled case law that, as the AT can, on its own initiative, proceed to official review of the tax act, within four years after the assessment or at any time if the tax has not yet been paid, on the basis of error imputable to the services (art. 78, no. 1, of the General Tax Law), the taxpayer can also, within that period of official review, request such review with that basis."

On the other hand, considering the reasons invoked to reject the request for official review in the sense that the "state surcharge has an accessory character of CIT, and should be treated as such and be determined on a yearly basis" (cfr. point f) of the evidence), this reasoning implies consideration of the legality of the additional assessment act by sanctioning the application to the case of art. 87-A of the CIRC from 1 January 2010.

Consequently, and in the first place, only if the review request concerned a self-assessment could the question of necessary prior objection be raised, which is not the case.

In the second place, it follows from what is stated in the evidence that the rejection of the review request implied consideration of the legality of the additional assessment act.

Terms in which the exception raised by the Defendant lacks merit.

B) Lapse of the Right of Action

The Defendant alleges that, pursuant to article 10 of RJAT, "the deadline for presenting the request for arbitral pronouncement of assessment acts is 90 (ninety) days, referring, as to the moment when counting begins, to what is provided for in nos. 1 and 2 of art. 102, nos. 1 and 2 of the Code of Tax Procedure and Process (CPPT)". And adds "(...)" that the stipulated 90 (ninety) day period would be counted from notification of the assessment statement now being challenged – in accordance with paragraph b) of no. 1 of art. 102, no. 1 of CPPT".

Thus, the Defendant concludes that since the "Additional assessment was notified to the taxpayer now Claimant on 29/12/2014..., with a payment deadline of 23/02/2015", "therefore, the request filed is untimely and the tribunal cannot hear it";

For the Claimant, "constituting the immediate object of the initial request the act rejecting the Request for Official Review, the 'payment deadline' (whatever it may be) is absolutely irrelevant to the present situation, which depends exclusively on notification of the rejection decision (or, alternatively, on the expiry of the legal decision period) of that procedural means"

Let us see.

It is established case law of the Supreme Administrative Court that, in the case of a request for official review, the deadline for challenge (which is to say, for requesting the constitution of an arbitral tribunal) is not counted from the date of voluntary payment deadline, but from when the rejection decision of that request is notified – see, among all, the Judgments of 1 October 2003 and 12 October 2011, in proceedings Nos. 893/03 and 449/11, respectively. To the same effect, cfr. the Arbitral Decision handed down in proceeding No. 432/2017-T.

On the other hand, it is also settled that the decision handed down on the request for official review can be judicially challenged and that, insofar as it upholds the assessment act, the latter is likewise the object of such challenge – cfr. articles 95 nos. 1 and 2 paragraph a) of the General Tax Law and 102 no. 1 paragraph e) of CPPT.

In the case at hand, the request for arbitral pronouncement is timely, since the Claimant presented that request on 26 July 2018 and the date shown in the notification of the rejection decision of the official review is 22 May 2018, as shown in the acknowledgment of receipt attached by the AT and which constitutes the first page of the PA attached with the Response.

Terms in which, being timely the request for constitution of the arbitral tribunal, the exception of lapse of the right of action lacks merit.

III-2-2 As to the Merits

C) Illegality of the Rejection of Official Review Due to Error in Interpretation of the Surcharge Created by Law No. 12-A/2010, of 20 June

The central question to be decided revolves around determining what the start date of entry into force of the State Surcharge, created by Law No. 12-A/2010, of 20 June, is.

In effect, the first question to be decided is to determine whether the State Surcharge, in the year 2010, applies to all taxable profit that will be determined on the last day of the financial year (as the Claimant argues) or whether that Surcharge can only be applied to the part of taxable profit corresponding to the period of time elapsed after the date of entry into force of Law No. 12-A/2010, of 20 June (1 July 2010) and the day 31 December 2010, the last day of the financial year in the concrete case, as the Defendant argues.

Article 2 of Law No. 12-A/2010, of 20 June created a State Surcharge, with a rate of 2.5% applying to the part of taxable profit exceeding € 2,000,000.00, and also created special rules for payment of the Surcharge in the case of groups of companies – art. 104-A and 105-A to the Corporate Income Tax Code (CIRC).

The question of succession over time of two different legal regimes regulating the same matter, despite generating numerous controversies, requires that the field of application of each be determined with precision, the relationships and acts to which they are applicable. The problem can be resolved by express provision of the legislator, in which the field of application of the new legal regime and of the replaced one is set out. When this legal instrument does not contain an express norm, one must look in Tax Law for a norm that disciplines the question.

In such hermeneutical task the tribunal is referred to the general norm, art. 12 of the General Tax Law (LGT), which undisputedly applies to tax norms.

Article 12, no. 1 of the LGT states that: "Tax norms apply to facts subsequent to their entry into force, and no retroactive taxes may be created".

However, for tax facts that began before the entry into force of the new law and extend beyond it, art. 12, no. 2 of the LGT provides that: "If the tax fact is of successive formation, the new law only applies to the period elapsed from its entry into force". That is, for tax facts of successive formation – which extend over time, such as periodic taxes, for example, personal income tax and corporate income tax, the new law only applies to the time interval elapsed after its entry into force.

Returning to the concrete case, if it is true that Law No. 12-A/2010, of 20 June, in art. 20, sets special rules as to its entry into force, the norms on the State Surcharge are not covered by the said normative, so the start of its validity occurred on 1 July 2010. Or, put another way, the said legal instrument does not contain a special provision that creates a different regime for the State Surcharge; only in such a situation could that special rule prevail over the general rule that comes from the LGT – art. 12, no. 2.

It is therefore time to formulate the following question: is it illegal to apply art. 2 of Law No. 12-A/2010, of 20 June to all taxable profit produced by the Claimant in 2010?

In this regard, it should be recalled that the Constitution of the Portuguese Republic (CRP), with the revision of 1997, came to expressly provide in its art. 103, no. 3 that no one may be required to pay taxes that have a retroactive nature, an option consolidated in 1998, with the provision in the LGT of rules on the temporal application of tax law, art. 12 of the said legal instrument.

In light of the teaching of ALBERTO XAVIER, it is possible to identify three degrees of retroactivity: i) 1st degree; ii) 2nd degree and iii) 3rd degree.

In retroactivity of the 1st degree or maximum, the fact occurred entirely under the old law, having already produced all its effects within that same law. The new law seeks to derive different legal effects from the same facts. In retroactivity of the 2nd degree or intermediate, the fact also occurred entirely under the old law; however, it differs from retroactivity of the 1st degree, in that its effects did not exhaust completely under the old law, as they continue to be produced under the new law. Decisive for determining the temporally applicable norm is the moment when the tax fact occurred and not when the norm is concretely applied. Finally, in the so-called retroactivity of the 3rd degree, the tax fact did not occur entirely under the old law; on the contrary, the production of its effects extends into the temporal domain of the new law. Therefore, the solution is to divide the income in accordance with the pro rata temporis criterion.

Article 12, no. 1 of the LGT prohibits retroactivity of the 1st degree or authentic in the language of the Constitutional Court, but the division of income in accordance with the pro rata temporis criterion is established normatively in art. 12, no. 2 of the LGT.

Thus, the State Surcharge established by Law No. 12-A/2010, of 20 June applies only to the part of taxable profit produced after its entry into force, so the provision of art. 12, no. 2 of the LGT applies – the general law; the AT could not apply the State Surcharge to the taxable profit, except from 1 July 2010 onwards. Thus, if the time interval of the year 2010 elapsed until 30/06/2010 is 181 days, while what occurred from 01/07/2010 is 184 days, applying the pro rata temporis criterion it is relevant for determining the State Surcharge for the year 2010 the percentage of 50.41% (184/365) of the part of taxable profit exceeding € 2,000,000.

The question is not new, since at least in two tribunals constituted under the aegis of the Administrative Arbitration Center (CAAD), it was concluded that the tax fact that generates the State Surcharge is the taxable profit of CIT – of a complex nature and that forms over the course of the financial year. Therefore, and pursuant to art. 12, no. 2 of the LGT, it is repeated, the State Surcharge only applies to the taxable profit that forms from 1 July 2010, thus applying the pro rata temporis principle.

It is also this interpretation applied by tax case law when it observes that: "Pursuant to no. 2 of art. 12 of the LGT, in cases, like the one sub judice, where the new law enters into force in the middle of the year, when the tax fact of successive formation is already in progress, taxation should only apply to the period subsequent to the entry into force of that law (See SÉRGIO VASQUES, ibidem, page 232.). That is, the tax fact should be divided, applying the old law to the income generated until the entry into force of the new law and applying the new law to the income generated after its entry into force. It is in this that the pro rata temporis criterion that the legislator established in that legal provision resides. This legal criterion aims, as also emphasized by the sentence with reference to numerous doctrinal indications, to prevent the retroactive application of tax law, which, in this case, would occur if Law No. 12-A/2010 intended, in particular through a transitional law provision integrated within it, to also apply to the period of the year 2010 already elapsed at the date of its entry into force. In truth, the position maintained by the Respondent, seeking that the state surcharge created by that Law, which entered into force on 1 July 2010, would also apply to the first semester of that year, that is, to a part of the taxable profit generated before the date of its entry into force – which we have seen does not happen as the pro rata temporis criterion established in no. 2 of art. 12 of the LGT applies – would lead to a situation of retroactive application of tax law, which we consider to be constitutionally barred (cfr. art. 103, no. 3, of the CRP)".

In sum, it is illegal to apply the State Surcharge (new law), which provides for a tax increase to income earned before the date of its entry into force, to the part of taxable profit occurring before the beginning of its validity, by violation of art. 12, no. 2, of the LGT.

Terms in which the Claimant's request is well-founded, and the rejection of the official review and the consequent additional assessment should be annulled, in the part of the surcharge (2.5%) charged under the state surcharge on taxable profit for 2010.

D) Right to Refund of Unduly Paid Tax and Indemnification Interest

The Claimant requests reimbursement of the amount of € 58,663.24, relating to state surcharge unduly assessed and paid, plus the corresponding indemnification interest.

Article 24, no. 1, paragraph b) of Decree-Law No. 10/2011, of 20 January (RJAT) provides that in case the arbitral decision is upheld, the AT must: " (…) restore the situation that would exist if the tax act subject of the arbitral decision had not been carried out, adopting the acts and operations necessary for that purpose;".

In the concrete case, following the partial illegality of the assessment act, there is grounds for reimbursement of the tax paid illegally, by force of articles 24, no. 1, paragraph b), of RJAT and 100 of the LGT, as this is essential to "restore the situation that would exist if the tax act subject of the arbitral decision had not been carried out".

Thus, the Claimant should be reimbursed for the State Surcharge paid illegally.

However, as stated in the Arbitral Decision handed down in proceeding No. 620/2017-T, inasmuch as "reimbursement depends on the calculation of the state surcharge" which is the responsibility of the Defendant, "it does not fall within the competence of this Arbitral Tribunal" and the concrete determination thereof is relegated to the execution of judgment.

The Claimant also filed a request for condemnation of the AT to pay indemnification interest, so it must be determined whether it has the right thereto.

Article 43, no. 1, of the LGT provides that: «Indemnification interest is due when it is determined, in gracious objection or judicial challenge, that there was error imputable to the services from which results payment of the tax debt in an amount higher than legally due». In other words, there are three requirements for the right to such interest: i) the existence of an error in an act of tax assessment imputable to the services; ii) the determination of such error in a process of gracious objection or judicial challenge and iii) payment of tax debt in an amount higher than legally due.

Thus, it is immediately possible to formulate a question: is it admissible to determine payment of indemnification interest in a tax arbitral process? The answer to the question is affirmative. In effect, art. 24, no. 5 of RJAT provides that: "Payment of interest, regardless of its nature, is due in accordance with the provisions of the General Tax Law and the Code of Tax Procedure and Process".

It happens that, in the present situation, the tribunal's act of cognition respects a decision of tacit rejection of a request for review of tax acts, and art. 43, no. 1 of the LGT determines that indemnification interest is only due for illegal recovery when the taxpayer challenges or objects. However, "official review" constitutes an institute distinct from administrative objection and judicial challenge.

In this regard, art. 43, no. 3 of the LGT provides that: "Indemnification interest is also due in the following circumstances: (…) c) When review of the tax act at the initiative of the taxpayer is made more than one year after the request thereof, unless the delay is not imputable to the tax administration»".

Thus, when "official review" of the tax act is requested by the taxpayer, if the AT exceeds the one-year period to conduct such review and decides favorably, indemnification interest is only due after the one-year period has elapsed. And if the taxpayer finds it necessary to resort to judicial means? The question is answered by case law stating that: "…if the taxpayer is obliged to resort to court to obtain a decision, because the Administration, within or beyond that period, did not review the act, this taxpayer is not treated differently from one who obtained the same favorable decision by administrative means after one year has elapsed. Similarly to the interested party whose request for review had a favorable outcome dictated by the Administration after one year, also the party who was only vindicated by the court after that time is owed the same interest. That is, in either case, the delay of more than one year is imputable to the Administration: either because it delayed in deciding, or because it decided against the taxpayer, only later to be shown in court that it should have decided otherwise." That is, art. 43, no. 3, paragraph c) of the LGT applies to a reality distinct from reimbursement to the taxpayer as a result of "error imputable to the services", that is, the delay by the AT in concluding the "official review" procedure.

Reverting such interpretation to the concrete case, if the request for review was made on 10 October 2017 and the decision on the request for official review was notified to the Claimant on 22 May 2018, indemnification interest is only due from 11 October 2018 onwards.

V. DECISION

Terms in which it is agreed in the present Arbitral Tribunal:

a) Declare the dilatory exceptions of lapse of the right of action and material incompetence of the arbitral tribunal to be without merit;

b) Declare the request for arbitral pronouncement partially well-founded, declaring illegal the additional CIT assessment No. 2014..., in the part in which it determined more than 50.41% of the part of the Claimant's taxable profit exceeding € 2,000,000.00;

c) Condemn the Defendant to refund to the Claimant the amount paid in excess, to be determined in execution of judgment;

d) Declare the request for payment of indemnification interest well-founded, at the legal rate, with start date on 11 October 2018;

e) Condemn the Defendant to payment of arbitral costs.

VI. VALUE OF THE CASE

The value of the case is set at € 66,680.01, in accordance with art. 97-A of the Code of Tax Procedure and Process (CPPT), applicable by virtue of the provision of art. 29, no. 1, paragraph a) of RJAT and art. 3, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

VII. COSTS

Costs to be borne by the Defendant, in the amount of € 2,448.00, cfr. art. 22, no. 4 of RJAT and Table I attached to the RCPAT.

Notify.

Lisbon, 28 February 2019

Fernanda Maçãs - Presiding Arbitrator

Francisco Nicolau Domingos (member)

Augusto Vieira (member)

Frequently Asked Questions

Automatically Created

What was the dispute about the state surcharge (derrama estadual) on 2010 IRC in CAAD case 358/2018-T?
The dispute in CAAD case 358/2018-T concerned whether the Tax Authority unlawfully applied the 2.5% state surcharge (derrama estadual) created by Law 12-A/2010 to the entire 2010 tax year. The taxpayer, a SGPS parent company under the RETGS group regime, argued that since Law 12-A/2010 only entered into force on July 1, 2010, the surcharge should apply exclusively to taxable profits exceeding €2 million generated from July 1 onwards, not to the first half of the year. The company B... S.A. within the group had taxable profit of €6,693,058.65, and the AT applied the 2.5% rate to the full amount exceeding €2 million (€4,693,058.65), while the taxpayer contended the rate should only apply to the portion attributable to the second half of 2010, resulting in alleged overpayment of €58,663.24.
How does the principle of non-retroactivity of tax law apply to the state surcharge introduced by Law 12-A/2010 of June 30?
The principle of non-retroactivity of tax law prohibits applying new tax obligations to facts or situations that occurred before the law entered into force. Article 12 of the General Tax Law (LGT) establishes the temporal application rules for Portuguese tax law. For IRC purposes, which constitutes a 'tax fact of successive formation' that only crystallizes at the end of the tax year (December 31), Article 12(2) LGT specifies that new tax laws apply only to the period elapsed from their entry into force. Since Law 12-A/2010 was published on June 30, 2010, and contained no special transitional provisions for the state surcharge in Articles 20(2)-(4), it entered into force on July 1, 2010 under the general rule of Article 20(1). Therefore, applying the state surcharge to taxable profits earned between January 1 and June 30, 2010 would constitute improper retroactive application, violating both statutory and constitutional principles of legal certainty and protection of legitimate expectations.
Can the 2.5% state surcharge be applied to taxable profits earned before Law 12-A/2010 came into force on July 1, 2010?
No, the 2.5% state surcharge cannot be legally applied to taxable profits earned before July 1, 2010, when Law 12-A/2010 entered into force. Although IRC is calculated on an annual basis and the tax liability crystallizes on December 31, the taxable profit represents a successive formation throughout the tax year. Article 12(2) of the General Tax Law (LGT) expressly provides that for tax facts of successive formation, new tax laws apply only from their effective date forward. Since Law 12-A/2010 lacks any express transitional provision extending the state surcharge to the entire 2010 year (such provisions appear only in Article 20(2)-(4) for other matters), the general temporal application rules apply. Retroactive application would violate Article 103(3) of the Portuguese Constitution, which prohibits retroactivity of tax laws except in specifically permitted circumstances. The proper methodology requires apportioning the taxable profit on a time basis, applying the 2.5% surcharge only to the portion attributable to July 1 - December 31, 2010, consistent with established arbitral jurisprudence on this matter.
What is the procedure for challenging an IRC state surcharge through a Pedido de Revisão Oficiosa and subsequent arbitration at CAAD?
The procedure for challenging an IRC state surcharge assessment involves several steps. First, the taxpayer must file a Pedido de Revisão Oficiosa (Request for Official Review) with the Tax Authority under Article 78 of the Tax Procedure Code (CPPT), requesting correction of the allegedly unlawful assessment. If the AT rejects the request (as occurred in case 358/2018-T with decision ...2017...), the taxpayer may then challenge that rejection through tax arbitration at CAAD (Centro de Arbitragem Administrativa) under the Legal Regime for Arbitration in Tax Matters (RJAT). The arbitration request must be filed within the statutory deadline after notification of the rejection decision. The CAAD President accepts the request and notifies the AT, then the Deontological Council designates a three-arbitrator panel (one presiding arbitrator and two members). The tribunal is formally constituted after parties have opportunity to object to arbitrator appointments. In the arbitration, the taxpayer can request both annulment of the rejection decision and the underlying assessment act, plus refund of overpaid amounts with compensatory interest, as demonstrated in this case where the claimant sought €58,663.24 refund plus €8,016.77 in accrued interest.
Are taxpayers entitled to a refund and compensatory interest (juros indemnizatórios) when the state surcharge is retroactively applied to the first half of 2010?
Yes, taxpayers are entitled to both refund of overpaid tax and compensatory interest (juros indemnizatórios) when the state surcharge is unlawfully applied retroactively to the first half of 2010. Article 43 of the General Tax Law (LGT) establishes that the State must pay compensatory interest when taxpayers are deprived of amounts due to unlawful acts by the Tax Authority or unwarranted delays in refunds. When an assessment is annulled for violating the principle of non-retroactivity by applying Law 12-A/2010 to the January 1 - June 30, 2010 period, the overpaid amount constitutes an undue payment that must be refunded. The compensatory interest accrues from the date of payment until the refund is made, calculated according to the legal interest rate. In case 358/2018-T, the claimant specifically requested €58,663.24 in principal refund plus €8,016.77 in compensatory interest already accrued, with continued accrual until actual repayment. This dual entitlement—principal refund plus interest—ensures taxpayers are made whole for the financial loss and time value of money resulting from the Tax Authority's unlawful retroactive application of the state surcharge, consistent with constitutional principles of taxpayer protection and administrative legality.