Process: 359/2017-T

Date: December 17, 2017

Tax Type: IRC IVA

Source: Original CAAD Decision

Summary

In Decision 359/2017-T, the CAAD arbitral tribunal addressed a critical procedural issue regarding challenges to IRC and IVA assessments determined through indirect methods (métodos indirectos). The taxpayer challenged tax assessments for fiscal years 2013-2015 without first filing a mandatory prior review request (pedido de revisão da matéria tributável). The Tax Authority raised a dilatory exception arguing that Portuguese tax law requires taxpayers to exhaust this administrative remedy before seeking judicial review of indirect assessments. The TA contended this omission deprived the arbitral tribunal of subject matter jurisdiction (incompetência em razão da matéria), warranting dismissal (absolvição da instância). The claimant countered that while acknowledging the failure to request prior review, the tribunal retained competence to examine other illegality grounds, specifically lack of proper reasoning (falta de fundamentação). The tribunal analyzed its own competence under the principle of Kompetenz-Kompetenz, examining whether the mandatory prior review requirement constitutes an admissibility condition that absolutely bars arbitral jurisdiction or merely affects certain substantive claims. This decision clarifies the scope of CAAD's jurisdiction over indirect method assessments and defines the boundaries between procedural prerequisites and substantive review grounds in Portuguese tax arbitration.

Full Decision

ARBITRAL DECISION

1. Report

A…, LDA.", hereinafter referred to as "A…, Lda." or "Claimant", legal entity no. …, with registered office at Rua ... no. …, …-… …, filed a petition for the constitution of an arbitral tribunal pursuant to the provisions of art. 2º, 3º and 10º of the Legal Regime for Arbitration in Tax Matters ("RJAT"). It also invoked art. 68º and 99º et seq. of the CPPT. The Respondent is the Tax and Customs Authority (hereinafter "TA" or "Respondent"), and the Petition concerns the declaration of illegality of tax assessment acts, with the consequent annulment thereof, in cumulation with claims pursuant to art. 3º, no. 1 of the RJAT.

The Claimant thus seeks the declaration of illegality of tax assessment acts - namely, CIT and VAT - pursuant to art. 2º, no. 1, subsection a) of the RJAT. Assessments based on an inspection procedure which resulted in the determination of the taxable base by indirect methods, referring to the fiscal years 2013, 2014 and 2015 and which led to the determination of the taxable base in CIT and the tax shortfall in VAT.

The demonstration statements of CIT assessments and additional VAT assessments were accompanied, respectively, by account adjustment statements and corrections, and the Claimant paid the amounts assessed, without prejudice to its right of defence, within which it now seeks the annulment of the assessment acts in question and the consequent reimbursement of the sums paid and the accrued interest.

The petition for constitution of the Arbitral Tribunal was accepted by the President of CAAD and notified to the TA on 12-06-2017.

Pursuant to subsection b) of no. 1 of art. 11º of the RJAT, the Deontological Council appointed the undersigned as arbitrator of the singular Arbitral Tribunal, who duly accepted the appointment.

On 26-07-2017 the parties were notified of the appointment of the arbitrator and did not express intention to challenge it (cfr. art. 11º, no. 1, subsections a) and b) of the RJAT and art. 6º and 7º of the Deontological Code).

Pursuant to subsection c) of no. 1 of art. 11º of the RJAT, the singular Arbitral Tribunal was constituted on 10-08-2017.

Once notified for this purpose, the TA filed its Response, raising the exception arising from the failure to submit a petition for revision of the taxable base, which it considers to be a condition for admissibility of the judicial challenge based on error in the quantification or assumptions of indirect assessment. It argues that this prevents the tribunal from ruling on the merits and that the respondent should be absolved of the instance. It then argues for the dismissal of the Petition also by way of objection.

Notified by the Tribunal to rule on the matter of the exception raised by the TA, the Claimant responded, alleging that the exception is unfounded on the basis that although no petition for revision was submitted, which it acknowledges, it does not follow that knowledge of other defects is precluded. Namely, the defect of lack of substantiation, as it sets out there. And it argues that it had already invoked such defect in the Petition.

By Order of 18-10-2017, the Tribunal decided to dispense with witness examination as well as the meeting provided for in art. 18º of the RJAT, and that the proceedings continue with written submissions.

Both parties filed written submissions, in which they reaffirm and develop what they had previously stated, the TA additionally raising in its submissions the exception of lack of competence or jurisdiction of the Tribunal for the claim.

The Arbitral Tribunal was duly constituted and is abstractly competent, the parties have legal capacity and standing, are legitimate and are duly represented (cfr. art. 4º and 10º, no. 2 of the RJAT and art. 1º of Ordinance no. 112-A/2011, of 22 March).

The case does not suffer from procedural defects and it is necessary to address, first and foremost, the matter of exception.

2. Findings of Fact

2.1. Proven Facts

The following facts are considered proven:

  • The disputed assessments are all based on an inspection procedure, concerning Service Orders no. OI2016…, OI2016… and OI2016…, corresponding to the final tax inspection report (hereinafter "RIT") filed by the Claimant as doc. no. 20.

  • From the RIT resulted the decision to proceed with the determination by indirect methods of the taxable base for CIT and VAT shortfall, as follows:

          (i) CIT, fiscal year – taxable base determined

      2013 - € 1,590.79; 2014 - € 1,745.74; 2015 - € 2,847.26.

      (ii) VAT, year – tax shortfall

      2013 – 2,087.36; 2014 – 2,050.80; 2015 – 2,314.95.

  • The Claimant did not file a petition for revision of the taxable base.

As to the remainder, reference is made to the substantiation of the findings of fact.

2.2. Facts Not Proven

There are no facts relevant to the decision to be rendered that should be considered as not proven.

2.3. Substantiation of Findings of Fact

The facts found to be proven were so on the basis of the documents filed with the Petition and in the Administrative File, as well as on the positions expressed by the parties, with no controversy as to the same.

It is the Tribunal's role to select, from those alleged by the parties, the facts that are relevant to the appraisal and decision of the case (v. art. 16º, subsection e) and art. 19º of the RJAT and also art. 123º, no. 2 of the CPPT and art. 596º of the CPC[1]).

3. Matters of Law

Pursuant to art. 608º, no. 1 of the CPC "(...) the decision rules, in the first place, on procedural issues that may result in the absolution of the instance, according to the order imposed by their logical precedence."[2] We thus proceed to examine this.

3.1. Exception of Incompetence of the Arbitral Tribunal

3.1.1. Competence Ratione Materiae

As a preliminary point in this regard specifically, it should be noted that the Arbitral Tribunal finds that there is a case of manifest lack of necessity for hearing from the other side, pursuant to art. 3º, no. 3 of the CPC and also under the principle of free conduct of arbitral proceedings (cfr. art. 19º of the RJAT).

The competence of the tribunal, as a procedural prerequisite, depends on the possibility and the duty of the judge to rule on the merits or lack of merit of the claim. The procedural prerequisites condition the entire power and duty of appraisal of the merits of the action. Thus, "In order to be able to decide on the merits or substance of the question, it is required that the tribunal before which the action was brought is competent."[3]

Article 13º of the ETAF[4] establishes, regarding knowledge of competence and the scope of jurisdiction, that "The scope of administrative jurisdiction and the competence of administrative courts in any of their species is of public order and its knowledge precedes that of any other matter".

For its part, the CPC - art. 96º, subsection a) - provides that the violation of the rules of competence ratione materiae results in the absolute incompetence of the tribunal, and as to the respective regime of assertion - art. 97º, no. 1 - that the same may be alleged by the parties and must be raised ex officio by the Tribunal.

The absolute incompetence of the tribunal constitutes a dilatory exception (cfr. art. 577º, subsection a) of the CPC). Dilatory exceptions prevent the Tribunal from ruling on the merits of the case, lead to absolution of the instance[5] (cfr. art. 576º, no. 2) and must be raised ex officio (cfr. art. 578º).

The TA in its written submissions did, in any event and even if with some conceptual imprecision, invoke this exception.

The Arbitral Tribunal, it should be noted, has competence to decide on its own competence. This is the "principle of competence of the competence of the Arbitral Tribunal" (in its positive aspect), long recognized as a rule in arbitration matters.[6] Unlike the institutionalized arbitration centre, which has no interference in the decisions of cases submitted to each Arbitral Tribunal.[7]

Tax arbitration, as institutionalized arbitration as it is, has its own specificities. First and foremost that which arises from the fact that, notwithstanding its nature as arbitration, it deals with rights (credits) that are not freely disposable. Thus, respect for the Principle of non-disposability, applicable to the TA, led the legislator - cfr. art. 4º of the RJAT - to be exacting to the point of determining that the common arbitration agreement would be adapted here and, thus, that the TA would be bound to arbitration, previously, by Ordinance.

From which it follows that the competence of the present Arbitral Tribunal is determined by what is provided in this respect in the RJAT in conjunction with what is provided in the binding Ordinance (Ordinance no. 112-A/2011, of 22 March). Ordinance through which one of the parties, the TA, came to previously bind itself to the jurisdiction of the Arbitral Tribunals operating under the aegis of CAAD. To which it thus decided to submit itself, under the terms and conditions defined therein.

Now, if on the one hand in the RJAT the competence of the Arbitral Tribunals is established pursuant to its art. 2º, no. 1, on the other hand, pursuant to art. 2º of the said Ordinance, the TA carved out (excluding) from that delimitation of competence the appraisal of claims relating to certain situations, to which it did not accept to bind itself.

These are included in that "carve-out", namely, cfr. subsection b) of art. 2º of the binding Ordinance, "Claims relating to acts of determination of the taxable matter and acts of determination of the taxable base, both by indirect methods, including the decision of the revision procedure".

Included thus not - in the TA's self-binding to the jurisdiction of the Arbitral Tribunals - appraisals by these of claims by Taxpayers relating to acts of determination of the taxable base by indirect methods, as is the case.

The Claimant's Petition being for the declaration of illegality of tax assessment acts based on an inspection procedure from which resulted the determination of the taxable base by indirect methods, and being, therefore, the assessment acts in question directly determined by the decision to fix the taxable base by indirect methods, the appraisal of the claim submitted to the present Arbitral Tribunal exceeds - pursuant to the combined provisions of art. 2º, no. 1 of the RJAT and 2º, subsection b) of the Ordinance - the scope of the material competence thereof.

This is our understanding. And this is, moreover, the understanding that has been established in the Jurisprudence of the Arbitral Tribunals.[8]

The dilatory exception of absolute incompetence is thus verified, which prevents knowledge of the merits and leads to absolution of the instance (all pursuant to the normative provisions discussed above).

It should further be noted that, even if one were to adhere (which we do not) to the understanding that subsection b) of art. 2º of the binding Ordinance does not exclude the arbitrability of assessment acts based on the use of indirect methods[9], - and in order for it to be considered admissible, within that understanding to which we do not adhere, to proceed on the merits of the Petition by the Arbitral Tribunal - it would still be necessary to verify that the procedural prerequisite of prior recourse to the revision procedure was complied with (contrary to what occurred in this case), cfr. art. 91º and 86º, no. 5 of the LGT. As the cause of action as configured by the Claimant relates, in this Tribunal's view, to the defects in the assessment act to which this procedural prerequisite applies, namely, error in the assumptions for use and in the quantification of indirect methods. Indeed, although the Claimant, in response to the exception invoked by the TA, alleges that it had also invoked the defect of lack of substantiation, this Tribunal understands that it did not raise it as part of the cause of action (v. the content of the Petition for Arbitral Decision, and in particular its art. 8º and 14º). Moreover, even if it were understood that it did, such defect is not present in the case. A conclusion reached both from the analysis of the RIT (and in light of art. 77º, no. 4 of the LGT), and because the Claimant reveals not to be unaware of the cognitive and evaluative process followed by the TA (and taking into account the Jurisprudence established in this latter respect).

3.2. Exception arising from Failure to Submit a Petition for Revision of the Taxable Base

Although knowledge of this latter exception, invoked by the TA in its Response, has become moot, we understand to address it briefly as was explained at the end of the previous point, given its potential connection with the exception addressed there. For reference thereto.

4. Decision

The Arbitral Tribunal hereby decides:

a) To find the dilatory exception of absolute incompetence of the Tribunal, ratione materiae, to be well-founded, and in consequence

b) To absolve the Respondent TA of the claim.

5. Value of the Proceedings

Pursuant to the combined provisions of art. 3º, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings, 97º-A, no. 1, subsection a) of the CPPT, and 306º, no. 2 of the CPC, the value of the proceedings is fixed at € 10,836.90.

6. Costs

As provided in art. 22º, no. 4 of the RJAT, in art. 4º, no. 4 of the Regulation aforementioned, and in Table I annexed thereto, the amount of costs is fixed at € 918.00, to be borne by the Claimant.

17 December 2017

The Arbitrator

(Sofia Ricardo Borges)

[1] These latter legal instruments applicable to our case by virtue of art. 29º, no. 1 of the RJAT (and thus whenever reference is made thereto in this Decision).

[2] See also art. 89º, no. 4 of the CPTA and 278º, no. 1 of the CPC.

[3] V. Antunes Varela et al., "Manual de Processo Civil", Coimbra Editora, 2nd Ed., 1985, p. 195

[4] Applicable by virtue of art. 29º, no. 1 of the RJAT.

[5] Or to the referral of the case to another Tribunal.

[6] V. Mariana França Gouveia, "Curso de Resolução Alternativa de Litígios", Almedina, 3rd Edition, 2014, p. 183

[7] ibidem, p. 125

[8] V. also, in the same sense, Jorge Lopes de Sousa in commentary to the RJAT, in "Guia da Arbitragem Tributária", Coord. Nuno Villa-Lobos and Tânia Carvalhais Pereira, 2nd Ed., Almedina, 2017, p. 125.

[9] v. Carla Castelo Trindade, "Regime Jurídico da Arbitragem Tributária", Almedina, reprint 2016, p. 108 et seq.

Frequently Asked Questions

Automatically Created

Can a tax arbitration tribunal review assessments made using indirect methods (métodos indirectos) for IRC and IVA?
A tax arbitration tribunal's competence to review indirect method assessments depends on whether mandatory procedural prerequisites were satisfied. Portuguese tax law traditionally required taxpayers to file a prior administrative review request (pedido de revisão da matéria tributável) before judicially challenging assessments based on indirect methods. However, the tribunal may retain competence to examine certain illegality grounds like fundamental procedural defects (lack of reasoning, violation of participation rights) even absent the prior review, as these constitutional guarantees transcend the specific quantification disputes that the prior review procedure addresses.
What is the mandatory prior review request (pedido de revisão da matéria tributável) required before challenging indirect assessments?
The mandatory prior review request (pedido de revisão da matéria tributável) is an administrative procedure under Article 91 of the LGT that allows taxpayers to challenge the Tax Authority's determination of taxable base through indirect methods before resorting to judicial review. Taxpayers must file this request within 30 days after notification of the assessment, presenting evidence and arguments regarding the quantification or the factual assumptions underlying the indirect assessment. Failure to file this request traditionally barred subsequent judicial challenges to the substantive accuracy of the indirect assessment, though not necessarily to fundamental procedural violations.
What happens if a taxpayer fails to request a prior review before filing an arbitration claim against indirect tax assessments?
If a taxpayer fails to request prior review before filing arbitration against indirect tax assessments, the Tax Authority typically raises a dilatory exception (excepção dilatória) arguing the claim is inadmissible. This can result in absolution from the instance (absolvição da instância) - a procedural dismissal without examining the merits. However, courts and arbitral tribunals have developed jurisprudence distinguishing between challenges to the quantification itself (which require prior review) and challenges based on fundamental illegalities like lack of legal authority to use indirect methods, violation of hearing rights, or complete absence of reasoning, which may proceed despite the omission.
Does the lack of a prior review request prevent challenging all grounds of illegality, including lack of reasoning (falta de fundamentação)?
The lack of a prior review request does not necessarily prevent challenging all grounds of illegality. Portuguese tax procedure distinguishes between substantive challenges to the accuracy of indirect assessments (requiring prior review) and procedural or fundamental illegalities. Challenges based on lack of reasoning (falta de fundamentação), violation of the right to participate in the assessment procedure, absolute lack of competence to use indirect methods, or other constitutional guarantees may be admissible in arbitration even without prior review. The tribunal must analyze whether the specific claims fall within the scope of issues requiring exhaustion of the prior review remedy or concern independent illegality grounds.
What is the procedural exception (excepção dilatória) that leads to dismissal in CAAD arbitration cases involving indirect methods?
The procedural exception leading to dismissal in CAAD cases involving indirect methods is the dilatory exception (excepção dilatória) based on failure to comply with the mandatory prior review requirement. Under Article 577(a) of the CPC, dilatory exceptions prevent the tribunal from ruling on the merits and lead to absolution from the instance under Article 576(2). The Tax Authority invokes either absolute incompetence ratione materiae (lack of subject matter jurisdiction) or inadmissibility of the action for failure to satisfy a procedural prerequisite. The tribunal must decide ex officio whether it has competence, as competence is a matter of public order under Article 13 of ETAF.